As Online Payment Volumes Grow, PayPal Stock Is a Buy on any Dip

Financial technology (fintech) darling PayPal (NASDAQ:PYPL) recently released its fourth-quarter results which showed that it finished 2020 strongly. PYPL stock, which has returned nearly 140% during the past 12 months, reflects those solid numbers. Today the shares hit a record high of $285.13.

PayPal (PYPL) logo overlays daylight photo of corporate building

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PayPal is an instantly recognizable company, a name we all know well. It offers payment services online and via mobile devices, generating revenue through fees on transactions. Due to its success, its market capitalization is just shy of $333 billion.

In today’s column, I will examine the company’s recent metrics, which show that it is a solid choice for all growth investors. If you do not yet own PayPal stock, you might consider buying its shares. Here’s why.

Evaluating the Company’s Earnings

According to the consulting firm McKinsey & Company, “The COVID-19 crisis is having a significant and widespread effect on global payments across sectors. The most striking and potentially lasting impact is an accelerating pace of change in the industry… Consequently, all forms of electronic peer-to-peer and consumer-to-business payments have been boosted.”

In 2020, the volume of online commerce increased worldwide, with many small businesses creating an online presence to stay afloat during the pandemic. Data from Statista shows that over 70% of U.S.-based online merchants accept PayPal.

We should also remember the importance of eBay (NASDAQ:EBAY) for PayPal stock. eBay requires its sellers to accept PayPal, mainly due to the protection that the payment platform offers to its users.

Helped by its presence on eBay, PayPal opened a record 72.7 million new active accounts during 2020. That metric, which jumped 95% versus 2019, is a really powerful figure, highlighting the effects of the pandemic. PayPal’s revenue jumped 22% year-over-year to $21.45 billion. Its total payment volume increased 31%, and the number of transactions on the platform climbed 25% YOY.

A final figure that impressed me was the company’s free cash flow of $5 billion. At a time when many large entities are struggling to manage their liquidity, PayPal’s financial management has been strong. 

The company also innovated last year. It added a way for American citizens to deposit their stimulus checks directly into PayPal. The firm also added a “Buy Now, Pay Later” scheme, allowing consumers to spend more. 

Further, at the end of last October, PayPal added its own crypto wallet, allowing users to buy, hold and sell cryptocurrencies. Getting in on this trend early could prove beneficial for the company as the demand for cryptocurrencies grows.

The Bottom Line on PayPal Stock

I expect PayPal to continue growing in the coming quarters, when it expects to add another 50 million new accounts. The company is also looking to increase its total payment volume by about 20% this year, roughly in-line with the 2020 increase. If the company meets its revenue forecast of $25.5 billion, PayPal stock is likely to climb further.

Some of its growth will likely come from increased usage of its cryptocurrency wallet. Interestingly, since last October, PayPal users who bought cryptocurrencies have been logging into the site twice as much as they did before their purchases. The fees and spreads that companies charge for these currencies are larger than for conventional currency transfers.

With its large market share, the increased demand for online financial services, and its innovations, PayPal appears to be “sitting pretty.” Thus, long-term investors could regard any decline in the shares as a good opportunity to invest in the company.

I think PayPal has a bright future ahead of it. However, PayPal stock is also a momentum name, often making large daily moves. Therefore, short-term traders should buy and sell the name cautiously.

Finally, those investors who do not want to buy a large number of PayPal’s shares might instead consider purchasing an exchange-traded fund (ETF) that owns the stock. Examples of such ETFs include the Amplify Transformational Data Sharing ETF (NYSEARCA:BLOK), the ARK Fintech Innovation ETF (NYSEARCA:ARKF), the Capital Link NextGen Protocol ETF (NYSEARCA:KOIN), and the ETFMG Prime Mobile Payments ETF (NYSEARCA:IPAY).

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. 

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