With the growth of digital payments very strong and likely to remain elevated going forward, PayPal (NASDAQ:PYPL), the runaway leader of the sector, continues to be a very good choice for risk-averse investors looking for a technology name. And going forward, PayPal stock will continue to have many powerful growth catalysts, including network effects and the expansion of its physical business.
Not surprisingly, the novel-coronavirus pandemic, which tremendously increased the popularity of e-commerce, has consequently resulted in an acceleration of demand for digital payments.
As ResearchandMarkets.com stated in May:
“People are using digital payment options to avoid contact and spread of infection through direct cash handling, and also to adhere to social distancing to curb the spread of Covid-19. Due to closure of local market places and to avoid public gathering, people are preferring online purchase of essential supplies, which in turn is increasing the demand for the digital payments market.”
As a leader in the digital-payment space, PayPal has, of course, benefited from the sector’s incredible growth. In fact, in Q3, its net revenue jumped 24% year-over-year, versus a 19% YOY jump in the first nine months of the year. Last quarter, its total payments volume jumped an impressive 36% YOY, excluding the impact of currency fluctuations.
According to the company, the latter increase represents an all-time record. Further, PayPal added 15.2 million net active users last quarter, and as of the end of the third quarter, it has a total of 361 million active accounts. Finally, the company remains extremely profitable, as it generated nearly $3 billion of free cash flow in the first nine months of the year.
Why PayPal’s Growth Is Likely to Stay Strong
PayPal CEO Daniel Schuman recently said that the pandemic had lowered the time needed to transition to digital payments “maybe three to five years.” After the pandemic, he indicated that he does not expect the e-commerce megatrend to ease.
I think Schuman, who expects e-commerce to retain its current 70% market share following the pandemic, up from 30% before the coronavirus, is a bit off the mark. It’s true that millions of consumers who rarely or never utilized e-commerce before the coronavirus have begun doing so regularly during the pandemic, and that these individuals will utilize it significantly after the Covid-19 pandemic.
Yet since many people like shopping at stores, especially for clothes and large-ticket items, while products can still be acquired more quickly at stores than online, I think we’ll see a roughly 50/50 split between physical stores and e-commerce post-pandemic. Still, that’s a very favorable mix for PayPal.
Also positive for PayPal and PayPal stock is the cycle of “network effects” that it enjoys. In other words, as more consumers use PayPal, more merchants will begin accepting it, which will incentivize even more consumers to utilize it.
In a related note, PayPal has been successfully moving into what it calls “physical retail,” i.e. providing retailers with QR readers that allow consumers to pay for products in stores using their PayPal accounts. Among the retailers that recently joined that program are CVS (NYSE:CVS), Nike (NYSE:NKE) and Bed Bath & Beyond (NASDAQ:BBBY).
The Bottom Line on PayPal Stock
PayPal has only scratched the surface of the huge global payments market, which, in 2018, the company estimated was worth about $110 trillion. PayPal’s first-mover advantage in digital payments, combined with the likely continued, rapid growth of the sector, should enable it to meaningfully increase its share of the global-payments market every year.
Consequently, I recommend that longer-term investors buy PayPal stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.