Three Tailwinds for PYPL Stock
Paypal Holdings Inc (NASDAQ:PYPL) is at the forefront of an incredibly important trend: digital payments. Everyone knows that e-commerce stocks are the next big thing, but few know just how much room PYPL stock still has left to the upside.
The company was founded in 1999, a generation before many of its competitors. That gives it an edge over the new crop of digital payments firms, most of which were established in the last five years.
PayPal’s decade-and-a-half head start gives it a lot of advantages. For instance, PayPal has 184 million users, something few (if any) rivals could match. Despite its massive size, the company still beat industry-wide growth in the first quarter of 2016.
Numbers on that scale could help PayPal dominate the digital payments market, especially since this sector is becoming more and more important to how the economy functions.
Think about it: companies like Amazon.com, Inc., Etsy Inc, and Alibaba Group Holding Ltd have surged in popularity. They are all online marketplaces and have put brick-and-mortar stores out of business, all while giving customers a new way of shopping.
Every item is just a click away. Instant. Painless.
There’s no hovering at the checkout counter, wondering if that new pair of shoes is worth it. Impulse is everything. PayPal facilitates this kind of activity and extracts a profit from the seller rather than the buyer, making it a no-brainer for the customer.
That being said, an economic slowdown in China poured cold water on the industry’s outlook. A lot of analysts expected the Asia-Pacific region to drive a ton of growth in the industry. There was a lot of anxiety about lower-than-expected growth this year.
PayPal’s share price collapsed under this pessimistic outlook, so what’s the real story? Are digital payments on the rise or are they dead in the water? Forecasts for this year’s growth suggest the latter, but personally, I don’t listen to such short-term nonsense.
Whether digital payments sweep through Asia today or tomorrow, it makes no difference.
It is inevitable. No one seems to contradict that because on some level, we’re aware there is no stopping the forward march of history. We evolve and our technology does too.
Take some comfort in that thought if you’re a PayPal stockholder. There’s simply no reason to believe the industry has rocked off its long-term trajectory. Why turn bearish on PYPL stock now that it’s trading at a discount? It wouldn’t make any sense.
But if you’re still not convinced, here are three factors that give PayPal a “triple threat” advantage over its rivals:
1. 14 Million Sellers
Pretty much every payments company imitates PayPal’s business model and although it’s neither here nor there, they try to pass it off as an original idea. They go into the offices of venture capitalists and pitch the same thing, over and over.
“We’re going to transform the way people make transactions,” they say.
Right. But how will you make money?
“We’re going to become really popular, then retailers and other merchants will be forced to accept our service to draw in customers. We’ll charge them a fee.”
OK, that sounds great, but it sounded even better when PayPal pitched the same thing 16 years ago. They’ve already executed this plan.
Remember when PayPal partnered with eBay Inc? The company gained a ton of visibility and now it has 14 million registered merchants. In other words PayPal has already achieved what other companies list as their “moonshot” goal. (Source: “PayPal Reports Strong First Quarter Results,” PayPal Holdings Inc, April 27, 2016.)
2. 43% Increase in Profits
We can talk about business models and e-commerce until we’re blue in the face, but ultimately it all comes down to one question: can you make money? Most payments companies cannot. PayPal can and does.
The company saw its bottom line surge in the aftermath of a divorce from eBay Inc. Net income in the first quarter jumped to $365 million, up from $255 million a year before. It was an extraordinary thing to watch its share price fall as its profits bore the fruit of an e-commerce boom. But seeing the share price fall only made me more bullish on PYPL stock.
3. Rising Number of Transactions
One of the most important industry metrics is how many transactions are taking place per active account. It is a measure of engagement between buyers and sellers on PayPal. In the first three months of 2015, the company processed 25 transactions per user, but that number was up to 28 after just 12 months. Mobile payments are helping to boost this number, particularly as merchants embrace loyalty programs that can only be accessed through apps. Smartphones are a huge driver of digital payments.
Like I said, PayPal is a “triple threat.” These kinds of numbers are unparalleled in the emerging payments industry! For all these reasons and more, I remain bullish on PYPL stock.