The trend away from cash and toward digital forms of payment is a global phenomenon. As a leader in digital money transfers and payment processing, PayPal Holdings (PYPL 1.43%) is uniquely positioned to profit from this megatrend. But is its stock a good investment from this point forward?
A strong competitive positioning
PayPal helps to make online shopping faster and more secure. It speeds up the online checkout process by eliminating the need for people to enter their credit card information, which also helps to lessen the possibility of identity theft. Merchants love it, because it helps to increase sales conversion rates. This is particularly true on mobile devices: PayPal's One Touch feature allows account holders to register a device and then quickly and easily make purchases on that device at millions of merchant sites. This makes shopping on smartphones much more convenient as purchases can be made with the click of a button. In turn, PayPal has become a powerful force in mobile payments. The company facilitated more than $73 billion in mobile payment volume in the second quarter alone -- a 37% year-over-year increase.
As a platform-based business, PayPal benefits from powerful network effects. As more merchants offer PayPal as a payment option, it becomes more valuable to consumers. And as more consumers begin using PayPal, it becomes more valuable to merchants. It's a virtuous cycle that has propelled PayPal's user base to more than 295 million and counting.
Intriguing growth prospects
PayPal operates in truly massive markets. Global retail e-commerce sales are projected to grow to more than $6.5 trillion by 2023, according to Statista, up from $3.5 trillion in 2019. PayPal has an approximately 20% share of this enormous market, and this figure is likely to rise in the coming years.
One reason PayPal is gaining share is the surging growth of Venmo. The popular peer-to-peer payments app grew its total payment volume by 64% to $27 billion in the third quarter, and it's on track to surpass $100 billion in TPV in 2019. PayPal has only just begun to monetize Venmo, but the app's more than 40 million users represent a sizable profit opportunity that should help to fuel the payment giant's growth.
Partnerships are also helping to accelerate PayPal's expansion. It invested $500 million in ride-hailing leader pioneer Uber and $750 million in Latin American e-commerce leader MercadoLibre earlier this year. Partnerships like these are helping to bring more users into PayPal's network, particularly in international markets.
A bargain price
At first glance, PayPal's stock may appear expensive at nearly 30 times analysts' earnings estimates for 2020. But it's not an unreasonable price to pay for a competitively advantaged business that's projected to grow its earnings per share by more than 18% annually over the next half-decade. It's an even better deal when you factor in the more than $5 billion in net cash on PayPal's balance sheet and its sizable equity investments.
Moreover, PayPal's shares could easily double in the next five years. If PayPal can maintain its 20% share of a global e-commerce market that's set to grow more than 85% by the end of 2023, its revenue could grow by at least that same percentage. With PayPal's profit margins likely to expand as it scales its operations, its net income could more than double during this same time. Earnings per share, meanwhile, could rise at an even higher rate if PayPal continues to repurchase its stock. So even if its price-to-earnings multiple contracts somewhat by 2024, PayPal's shares are still likely to fetch more than twice today's price by then. That makes the digital payment leader's stock a great buy today.