PayPal (NASDAQ:PYPL) stock is certainly ending the year on a very bullish note. The shares are up a hefty 116%.
The company is one of the pioneers of the fintech space, having been founded in 1998. The founding team included some of Silicon Valley’s top operators like Peter Thiel, Tesla’s (NASDAQ:TSLA) Elon Musk and LinkedIn’s Reid Hoffman. They have often been referred to as the “PayPal mafia.”
Now it true that PayPal does face much more competition nowadays. Square (NYSE:SQ) is one of the biggest rivals. But there are also a variety of fast-growing startups that are gunning for the payments category. And even traditional financial institutions – like Bank of America (NYSE:BAC) and JPMorgan (NYSE:JPM) – are worthy competitors.
But despite this, PayPal stock still looks attractive, even with the high valuation. So let’s take a look at three key reasons for this:
Global Scale
Having scale is critical in the payments business. This allows for economies of scale that provide for more resources for R&D (research and development) and acquisitions.
And yes, PayPal has been able to leverage on this. A critical step, though, was the spin-off from eBay (NASDAQ:EBAY) in 2014. This gave PayPal more flexibility to expand its business. Keep in mind that its market capitalization is now $276 billion, which compares to eBay’s $36 billion.
Here are the latest metrics for PayPal’s global platform for the latest quarter:
- 361 million active accounts
- 4 billion payment transaction
- $247 billion in total payment volume (TPV)
- 40.1 transactions per active account
PayPal also owns Venmo, which is the must-have payments app for younger generations. In the third quarter, there were 65 million users and the TPV soared by 61% to $44.3 billion. In fact, Venmo is still in the early stages of monetization.
The Growth Story for Paypal Stock
A key part of the growth story has actually been the novel coronavirus. Because of the stay-at-home orders and limited availability of retail operations and restaurants, consumers had little choice but to use ecommerce solutions.
So then with the vaccines rolling out next year, might this slow down the growth for PayPal? Not necessarily. First of all, PayPal has been aggressively expanding its brick-and-mortar payments business. Keep in mind that the company has more than 20 million active merchant accounts.
PayPal also introduced a QR code system that provides for contactless payments in physical stores. Some of the partners include biggies like Nike (NYSE:NKE) and CVS Health (NYSE:CVS).
If anything, the Covid-19 virus accelerated the ongoing trend to digital payments. And as customers become accustomed to this – and benefit from the convenience – it does not seem likely that there will be much of a fall off in usage.
Innovation
When tech companies get to the size of PayPal, it’s usually difficult to innovate. The result can often been existential as seen with companies like Nokia (NYSE:NOK) and BlackBerry (NYSE:BB).
But for PayPal, this does not appear to be a problem. It seems that innovation is part of the company’s cultural DNA. No doubt, PayPal’s development of Venmo is a prime example of this.
Or look at what the company is doing with cryptocurrencies. The company launched a service that makes it easy to use its app to buy, hold and sell these virtual assets. There will also be the ability to make transactions with merchants, which could be a game changer.
According to CEO Dan Schulman, on the latest earnings call:
“And it’s also clear that digital wallets are a natural complement to all forms of digital currencies. These trends create an opportunity for us to work with central banks and regulators to shape a modern and inclusive financial system built on more efficient digital infrastructure designed for the future. The digitization of the global economy, combined with the rise of digital wallets, will drive our growth over the next decade. Our scale, two-sided network, trusted brand, our strong relationships with regulators around the world, and our AI and data modeling capabilities can all be leveraged to ensure our PayPal and Venmo apps are essential parts of our customers’ daily lives.”
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.
