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Is PayPal Holdings Stock a Buy?

By Jennifer Saibil - May 5, 2020 at 8:42AM

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The payment processing giant has more room to grow and is benefitting from the expansion of e-commerce.

As more and more fintech companies enter the digital payment space offering cutting-edge technology and niche services, it might seem like Paypal (PYPL -3.31%) has already seen its day in the sun.

But as the industry continues to grow, Paypal continues to lead. With the highest name recognition in digital payments and online merchant services, Paypal keeps upping its technology and making key acquisitions that keep it ahead of the pack. Does it have what it takes to stay at the head of the pack? 

Multiple revenue streams to tap into

One of PayPal's strengths is that it operates several growing revenue streams instead of relying on one simple business. For instance, it has incredible brand recognition in digital payment services, but it also makes money as a payment processor for businesses that need help handling credit card payments.

There are many payment processing companies out there, but PayPal has an edge with its brand recognition, easy-to-use tools, and innovative services for merchants. It charges merchants a flat monthly fee to use its services as well as a fee per transaction, which represents 92% of total payment volume in the fourth quarter. PayPal doesn't charge for sending money within the U.S. or using a PayPal balance for shopping, but it does charge for instant transfers.

A smartphone displaying the PayPal app is surrounded by items such as a credit card, shoes, and a watch.

Image source: PayPal.

Expanding its reach through acquisition

Paypal's fourth quarter, which ended before the worst of the COVID-19 pandemic hit, showed high increases in sales and customer engagement, with 18% currency-neutral revenue growth and a 10% increase in transactions per active customer accounts. In fact, PayPal reported that transactions grew by double-digits for the first time this year. Non-GAAP earnings per share rose 24% to $0.86.

It's important to note that the increases are not organic; much of it comes from the acquisitions of Venmo and Braintree (which offer similar services to PayPal), Venmo in peer-to-peer payments and Braintree on the merchant side. PayPal made these acquisitions to strengthen market share as well as improve its own service offerings. Organic net new active accounts were down 15% in the fourth quarter, but it still added 9.3 million net new active accounts, driven by PayPal and Venmo.

However, PayPal is letting on that it has lots of tricks up its sleeve to keep the growth going. One of those is mobile, a growing source of engagement representing 44% of total payment volume. 

Going to new places

In acquiring Honey, which it did in November 2019, PayPal is opening up new opportunities in digital commerce that position the company to do much more than payment processing and maintain its record of double-digit growth. Honey is an app that scours the internet for coupon codes and applies them at checkout. This adds value for PayPal customers, encouraging them to complete checkouts and giving them an incentive to complete the transactions using PayPal instead of another pathway, like a credit card.

It also recently acquired GoPay, a Chinese online payment provider, to benefit from transactions in China, the first payment provider licensed to do so in that country. And it has developed relationships with banks and other online shopping destinations to offer easy payment options for customers.

High valuation, but still room for growth

Unlike many other companies that have been hard-hit by COVID-19, PayPal's business isn't likely to suffer as customers do their shopping online since that's what the company is all about. Its model means it makes money in many different kinds of circumstances, especially because it's building out different revenue streams that hedge the company's risks during different and difficult times.

Because of its size -- it has $13.6 billion in free cash -- Payal has tremendous opportunities that aren't available to other non-traditional financial companies, and it's making good use of that cash via acquisitions and expanding its product line, partnerships, and revenue base.

While the company's share price took a little COVID-19-induced tumble in late March, it has since climbed back to its 52-week high levels and is trading at nearly 58 times earnings making it fairly pricey. It also does not offer a dividend. PayPal is all about growth, and if it continues to use its assets to grow aggressively, garnering greater market share and becoming an indispensable part of e-commerce, investors have many reasons to be confident about the financial company's future prospects and potential for further increases in its share price.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings and recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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