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The 1 Stock You've Been Overlooking for Your IRA

By Matthew Cochrane – Dec 8, 2018 at 12:02PM

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This fintech leader still has a long runway of growth ahead of it while holding a competitive advantage over would-be rivals -- exactly the type of stock you should want compounding in a retirement account.

One of the best vehicles for retirement savings is the IRA (individual retirement account). Whether investors ultimately decide to direct their retirement savings into a traditional or Roth IRA is of secondary importance, since both offer unique tax-saving advantages that allow savers to more quickly compound their funds to better financially prepare for their golden years. Of course, once a saver's money is funneled into an IRA, the question remains what to invest it in. For long-term savings, the gold standard remains a company showing healthy growth with a demonstrable competitive advantage in a growing total addressable market. One candidate that I believe fits this bill is PayPal Holdings Inc. (PYPL 1.64%).

Growing markets

PayPal stands poised to benefit from several long-term trends, not the least of which are e-commerce, transactions made online, and mobile commerce, commonly called m-commerce, which consists of purchases made using mobile devices. Every metric we look at shows these two forms of shopping gaining share at the expense of sales made at physical locations.

A smartphone showing an online shopping cart icon while a real shopping cart sits in a store aisle in the background.

Domestic e-commerce is growing three times as fast as overall retail sales, a trend PayPal is perfectly positioned to benefit from. Image source: Getty Images.

In the 2018 third quarter, total domestic retail sales grew to $130.9 billion, a 5.3% increase year over year. While that is decent growth, indicating a robust economy, e-commerce sales rose 14.5% year over year, nearly three times as fast, according to the U.S. Census Bureau. While e-commerce is quickly increasing, m-commerce is also rapidly taking up a larger share of online sales. In 2018, m-commerce is projected to represent 39.6% of all e-commerce sales, according to eMarketer, and by 2021, that percentage is expected to increase to 53.9%.

Both these trends feed into PayPal's digital payments platform. In Q3, PayPal's total payment volume rose to $143 billion, a 24% increase over 2017's third quarter. PayPal's mobile payment volume -- transactions facilitated using a mobile device -- rose to $57 billion, a 45% increase year over year, good for about 40% of PayPal's total payment volume. Venmo, PayPal's mobile platform so popular with millennials, can now be used to make purchases at participating merchants in addition to P2P payments. The platform is still showing explosive growth, and payment volume increased 78% over 2017's Q3 total.

With 254 million active accounts and strong payment volume growth, it is evident PayPal is well positioned to capture growth as consumers turn more and more to e-commerce and mobile devices to do their shopping.

PayPal's competitive advantage

PayPal's digital wallet platform offers consumers two key features in the digital age: convenience and security. For instance, take its One Touch feature. One Touch allows users to register a device, whether a PC, phone, or tablet, and then make online or mobile purchases from that device through participating merchants with just "one touch." The process is easy and secure for consumers, who don't have to worry about filling in payment information before making purchases or leaving their information on a site they are unfamiliar with and which later might be breached by those with malicious intent.

Retailers love the platform because checkouts completed with PayPal have a much higher sales conversion rate than those completed with other platforms. In a new study, PayPal Checkout featured an 88.7% sale conversion rate, defined as the number of sales that are completed once an item is placed in an online shopping cart within the same browsing session. Other digital wallets averaged a 55.3% sales conversion rate.  

The platform is clearly a winner with consumers and merchants alike. In the company's 2018 third-quarter conference call, management reported that One Touch now had 112 million consumers and 10.4 million merchants participating in the program.

The universal payments platform

PayPal is a payments platform that is agnostic concerning bank, device, operating system, or merchant -- the largest digital wallet that can make this claim. With 254 million active accounts, the company is seemingly growing its network effect moat, too. The more consumers on the platform, the more incentivized merchants are to accept PayPal as a payment method. And, the more merchants that are accepting it at checkout, the more consumers will be interested in having an account. The company's success is literally feeding itself.

PayPal's strong growth and how it is positioned to capture future opportunities appear to make it an ideal candidate for investors to hold in their retirement accounts, where the stock can compound uninterrupted for years, exactly the reason why I hold shares in my own Roth IRA.

Matthew Cochrane owns shares of PayPal Holdings. The Motley Fool owns shares of and recommends PayPal Holdings. The Motley Fool has the following options: short January 2019 $82 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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