PayPal: Do 20%+ Growth Prospects Justify A Sky High Valuation?
After such a powerful rally, a common question that investors are asking themselves is, “Is it too late to invest in PYPL shares?” John Ballard, a Nobias 5-star analyst, who covers technology for The Motley Fool, recently covered this question himself, penning an article titled “Is It Too Late To Get In On This Millionaire-Maker Stock?”, ultimately coming to the conclusion that “It's not too late to put this growth stock in your nest egg.” Ballard notes that while PayPal is up more than 550% during the past 5 years, pushing its market cap up above the $300 billion threshold, the company continues to post strong growth. During its most recent quarter, he says that PayPals “revenue and adjusted earnings per share up 21% and 31%, respectively.” He noted that, “The company likely crossed $1 trillion in trailing 12-month payment volume in the first quarter, and it's still growing around 20% annually.”
Ballard says, “The company introduced several new features last year to increase user engagement with the PayPal and Venmo apps, including buy now, pay later, check cashing, cryptocurrency trading, and QR codes for contactless checkout in-store.” He says that PayPal is succeeding in addressing needs for both individual customers and business clients, highlighting impressive network statistics, saying, “PayPal is a trusted platform for businesses with a merchant network 29 million strong, and Venmo is already a widely used P2P app that processed $47 billion in payments last year for an increase of 60%. If a wave of small business owners start opening accounts on Venmo to accept payments, that could stoke the fire of an already explosive growth vehicle for the company.”
Ballard notes that the company is trading with a very high valuation premium; however, he believes that the company’s growth prospects will more than make up for the valuation risks over the long-term, saying, “It's uncertain where the stock will go in the near term as it trades at a high valuation of 59 times forward earnings guidance, but I wouldn't quibble too much over the high price tag. PayPal is pursuing a multi-trillion dollar addressable market.”
One of the most exciting growth drivers for PayPal is the cryptocurrency space. The company has taken steps to allow crypto purchases within its suite of apps and on May 4th, Eric Volkman, a Nobias 5-star analyst writing for The Motley Fool published an article highlighting recent rumors that the company was considering entering into the crypto market in a much bigger way, with plans for a company specific stable coin.
Volkman wrote, “On Monday, cryptocurrency news site The Block reported, citing "four sources with knowledge of the situation," that PayPal has held discussions with numerous stablecoin developers; one specifically mentioned was blockchain specialist Ava Labs.” He explained, “Unlike a traditional cryptocurrency like Bitcoin, which essentially exists as a stand-alone instrument, a stablecoin is pegged to a "real world" asset such as the U.S. dollar. This theoretically makes it a more stable investment, although in practice there is no such thing as a "stable" financial product -- even the hardest of hard currencies or bluest of blue chip stocks experience volatility at least once in a while.”
At this point, these reports are just rumors; however, Volkman notes that an unnamed PayPal spokesman said, "As a global company working with regulators and industry partners throughout the world to shape the next generation of financial systems, the company is in frequent conversation about technologies that enable these goals." But, if you don’t believe in the crypto market (at this point, even though the price of these digital assets are roaring higher, the prices are largely based on speculation and there are many critics who say that the use case for the digital assets is lacking), there are more traditional financial metrics that bode well for PayPal’s growth as well.
Divya Premkumar, a Nobias 5-star analyst who writes for InvestorPlace, recently published an article, highlighting several short-term and long-term bullish tailwinds at the back of this fintech name. First of all, she notes that stimulus checks and the stay at home economy created by the COVID-19 pandemic are bullish for PYPL, saying, “With global saving rates topping $5.4 trillion, we are likely to see an increase in consumer spending as we approach the new normal. With the digital payments expected to be the norm in the future, all arrows point towards greater upside in the coming months.” Sticking with the pandemic theme, she says, “Secondly, the coronavirus pandemic has ushered in a touch-less society leading many people to use digital payment apps for their purchases. For many fintech companies, what started out as offering a more efficient way to pay for things has now transformed into a traditional financial services stack.”
Premkumar says that PayPal added 73 million user accounts during the pandemic and “Looking ahead, the company’s pandemic tailwinds are here to stay. PayPal expects to add 50 million new accounts in 2021 and increase its total user base to 750 million by 2025.” All of this user growth is resulting in strong transaction growth which has quickly bolstered PayPal’s bottom-line. She notes that the company is looking to generate more than $40 billion in free cash flow during the next 5 years.
Like Ballard, Premkumar touches upon PayPal’s high valuation; however, its the company’s growth that shines brightest to her as she concludes her PayPal analysis saying, “PYPL stock isn’t exactly cheap, trading at 59 times forward earnings but with numerous opportunities for growth, it’s definitely worth adding to your portfolio.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Jennifer Saibil, another Nobias 5-star analyst writing for The Motley Fool, also recently highlighted the impressive size and scale of PayPal’s business, saying, “PayPal ended 2020 with 377 million active accounts (that's more than the U.S. population) and 29 million merchant accounts. Total payment volume (TPV) was $936 billion, as compared with competitor Square's $112 billion.” Saibil believes that PayPal is one of the very best ways to play the digital transformation of commerce moving forward. She noted that “McKinsey research found that customers have been increasingly moving toward digital payments, with the biggest growth in people using more than one digital payment type.” And, with this in mind, she concludes that “Between these tailwinds and PayPal's position as the dominant player in the industry, there's a lot to expect from PayPal in the coming years.”
When looking at the bull/bear reports recently published by 4 and 5-star rated analysts tracked by the Nobias algorithm, there’s a clear bullish sentiment surrounding this stock. We see that there have been 26 “Buy” opinions published by blue chip analysts since the start of April, compared to just 8 “Sell” ratings. Those who’re bearish on the stock harp upon the company’s high valuation. It’s true that PayPal is currently trading with a price-to-earnings ratio that is well above its long-term historical average (PYPL is currently trading with a blended P/E multiple of 60.7x whereas its average multiple since being spun out of Ebay in 2015 is just 34x). Yet, it appears that the vast majority of analysts that we track believe that the growth that PayPal exhibits (PayPal has posted 25%+ earnings-per-share growth during each of the last 4 years and analysts expect to see 20%+ growth continue for the foreseeable future) is more than enough to justify the current share price.
Disclosure: Nicholas Ward has no position in PYPL, but may initiate exposure within the next 72 hours. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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