PayPal's (PYPL 1.69%) stock price has been on a tear over the past year. But with multiple catalysts fueling its growth, the payments titan appears set to deliver even more gains to investors in the years ahead.
Here are three reasons why investors may want to consider buying some shares of PayPal today.
Winning in mobile
Few businesses are benefiting as much as PayPal from the staggering growth of e-commerce. With online sales being far more likely to be completed via digital-payment methods than in-store transactions, e-commerce is fueling a massive global shift toward digital payments and away from cash transactions.
This trend is a boon to PayPal. The company enjoyed a 30% surge -- to $114 billion -- in the volume of payments processed on its network in the third quarter. That helped drive a 21% rise in revenue and a 36% jump in free cash flow.
Moreover, PayPal is a clear winner in the segment of e-commerce known as mobile commerce. People are making more purchases on their smartphones and tablets than ever before, and PayPal's One Touch technology is particularly useful in this small-screen environment. Entering credit card data and other payment information into mobile devices has long been a pain point for consumers. One Touch solves this problem by allowing shoppers to complete online transactions with the click of a button.
Merchants also love One Touch. By making online purchases easier to complete, One Touch helps to improve conversion rates. In fact, PayPal's One Touch converts 87.5% of online sales -- nearly double the industry average of 45.6% -- according to a study by comScore.
These benefits helped PayPal's mobile payment volume soar 54%, to $40 billion, in the third quarter. Yet these figures may pale in comparison to what lies ahead.
Business Insider projects that m-commerce will account for 45% of total U.S. e-commerce sales by 2020. That's $284 billion in mobile transactions that PayPal could potentially help facilitate. Thus, even after years of torrid growth, mobile commerce still represents a massive and largely untapped market opportunity for PayPal.
A wise divestiture
In addition to long runways for growth, PayPal also possesses a fortress-like balance sheet with more than $7 billion in cash and no long-term debt. And it recently took action to fortify its financial position even further by agreeing to sell its consumer credit receivables portfolio to Synchrony Financial (SYF 0.16%).
As part of the sale, PayPal will receive about $5.8 billion in cash. The deal, which is expected to close in the third quarter of 2018, also includes a profit-sharing agreement. PayPal will still benefit from the growth of customers using its credit product, even as it transfers the risk and costs associated with running the business over to Synchrony.
That's a pretty sweet deal for PayPal. It can use the cash it received to further strengthen its balance sheet. It also could use it to ramp up share repurchases. PayPal even could use it to initiate a dividend, particularly since the deal is also expected to boost its annual free cash flow by a cool $1 billion. Those are all good options for investors, and it gives PayPal's shareholders many ways to win.
Venmo me some profits
Here's another way PayPal's investors can win: I'd argue that PayPal's stock is a buy based on its core business alone. If I'm correct, then investors who buy shares today are getting a free call option on the potentially massive upside of PayPal's popular social payment app, Venmo. Venmo processed $9 billion of payment volume in the third quarter -- a 93% year-over-year increase -- driven by the highest number of new-account activations in its history.
PayPal has yet to do much to monetize this valuable asset, with Venmo primarily being used as a free person-to-person payment app. But that's about to change. Just days before its third-quarter earnings release, the company announced that more than 2 million retailers would accept Venmo as a new method of payment.
Now that Venmo can be used to purchase goods and services from millions of businesses -- a service for which PayPal will earn a fee from merchants -- the popular app should finally start to contribute meaningfully to PayPal's revenue and profits. It may be a relatively small contribution at first -- PayPal plans to take a measured approach in regards to Venmo's monetization -- but the long-term impact could be quite significant. As such, investors may wish to consider buying some shares in PayPal today -- before the market catches on to Venmo's full profit potential.