When PayPal (NASDAQ:PYPL) was spun off from eBay (NASDAQ:EBAY) in July 2015, PayPal stock looked expensive.
Indeed, “when-issued” trading (which establishes market prices before spinoffs actually occurs) valued PayPal at around $39 per share. At that level, PayPal had a market capitalization of $47 billion.
That seemed huge. Bear in mind that, as InvestorPlace contributor Jeff Reeves pointed out in a spirited defense of PayPal stock at the time, eBay had acquired PayPal in 2002 for just $1.2 billion.
Certainly, PayPal had an intriguing niche in e-commerce. But its valuation was high and investors feared (correctly, as it turned out) that PayPal would lose eBay as a customer.
Over the five and a half years following the spinoff, PayPal stock rallied about 500%. Its market capitalization incredibly sits at $292 billion. PayPal is the 20th-most valuable company listed on U.S. exchanges.
PayPal trades hands for 52 times analysts’ average 2021 earnings estimate. Its market capitalization is more than 80% that of Mastercard (NYSE:MA) and more than 50% of Visa’s (NYSE:V). Those, of course, are two of the best companies in the world, let alone the payments space.
But as history shows, investors who fretted that PayPal stock was too expensive failed to profit from its huge gains. And while I wouldn’t expect the shares to rally another 500% over the next six years, I don’t believe that investors should avoid the stock because it’s “too expensive,” particularly with the company poised to report its earnings soon.
The Case for Buying PayPal Stock
The core case for PayPal stock is relatively simple: the company has not just years, but decades, of growth still to come.
After all, the development of the digital payment industry is less than 50% complete. The market as a whole is growing, and, meanwhile, PayPal is taking market share in multiple other sectors.
And PayPal’s revenue can be boosted by multiple other positive catalysts. Most notably, the company is quickly becoming a force in cryptocurrency. One analyst has estimated that the company could generate more than $1 billion of revenue from cryptocurrency by 2022. And since PayPal doesn’t have to share the fees it earns from crypotcurrency with the card networks, those fees may carry higher profit margins than much of the rest of its business.
Essentially, PayPal is set to benefit from multiple major trends going forward. The growth of e-commerce isn’t slowing down. Nor is the transition to a “cashless” society, which will benefit digital-payment players,. including PayPal. Add in PayPal’s positive cryptocurrency catalyst, and the company’s growth potential is obvious.
Bulls certainly admit that PayPal stock looks expensive. For a company worth over $270 billion to be valued at over 50 times its expected earnings is close to unprecedented. Only Amazon.com (NASDAQ:AMZN), Nvidia (NASDAQ:NVDA), and Tesla (NASDAQ:TSLA) have achieved that combination for any period of time.
Of course, that’s sort of the point. Those companies have some of the best growth stories of all-time. PayPal probably should be in that category.
What Can Go Wrong
But “probably” is the key word in the latter sentence. PayPal’s story is excellent, but not quite perfect.
The cryptocurrency driver is only important for investors who are optimistic about the long-term outlook of Bitcoin. I remain skeptical about the currency, although I’ve been wrong about it so far.
Even if the cryptocurrency market does thrive, Square (NYSE:SQ) has been positioning itself to benefit from the trend for quite a while. It will be a fearsome competitor in that space.
In general, competition does seem to be a big risk for PayPal. Square’s Cash App does appear to be outperforming PayPal’s Venmo. Elsewhere in the sector, the trend of SPAC (special purpose acquisition company) mergers has brought a number of payments plays to the public markets, enabling a number of PayPal’s competitors to raise capital that they can use to accelerate their growth.
Paysafe, which is going public via a merger with Foley Trasimene Acquisition II (NYSE:BFT),a SPAC, is just one of the rivals taking aim at PayPal by focusing on specific end markets. (In Paysafe’s case, one of those attractive markets is online gambling.) Older payment companies like Fiserv (NASDAQ:FISV) are looking to defend their turf as well.
Those issues do raise some questions about the valuation of PayPal stock. PayPal in fact reminds me of another well-known tech company with a high valuation: Adobe (NASDAQ:ADBE).
In both cases, there has not been much debate about the quality of the companies’ underlying businesses. No reasonable investor believed, or believes, that either PayPal or Adobe is heading for some kind of collapse. Rather, those who have been bearish on both names have stressed the companies’ valuation and competition.
Adobe has kept rallying despite those concerns. So has PayPal. In both cases, the bulls’ simple arguments prevailed. These are wonderful companies worth owning. Sometimes investing is as simple as that.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
