The world is going digital, and the coronavirus pandemic has accelerated this megatrend. That's why companies that effectively leverage the internet to provide goods and services are positioned to succeed in the coming decades. Let's explore the reasons why Amazon.com (AMZN 0.45%) and PayPal (PYPL 0.41%) could make great long-term additions to your portfolio.
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1. Amazon.com: Investing in last-mile logistics
Few companies are as well positioned to stand the test of time as Amazon. The tech giant dominates the U.S. e-commerce and global cloud infrastructure markets with market shares of 39% and 33%, respectively, according to recent estimates. Amazon has also established a foothold in video streaming through its Amazon Prime service. Management can drive continued growth by investing in last-mile logistics infrastructure and direct-to-consumer entertainment.
According to Bloomberg, Amazon plans to open up to 1,000 small delivery hubs in cities and suburbs all over the U.S. to bring products closer to consumers and make delivery as fast as possible. This move will help the company hold its own against brick-and-mortar rivals like Walmart and Target, which could potentially chip away at the platform's e-commerce dominance through their logistics advantage of having physical stores.
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Amazon is also boosting its moat by differentiating Amazon Prime from Walmart's free delivery membership, Walmart+. According to Variety, Amazon has purchased rights to Eddie Murphy's Coming 2 America for roughly $125 million. The much-anticipated film will premiere for free on Amazon Prime Video -- offering a tremendous value to subscribers that Walmart+ can't imitate. The news site Observer estimates that Amazon Prime boasts 150 million subscribers, with at least 26 million regularly using Prime Video as of 2017.
Amazon boasts a price-to-earnings multiple of 126, which is much larger than the S&P 500 average of 35. But the company may deserve its lofty valuation because of its rapid growth and how well it is positioning itself for continued dominance in its industry. Second-quarter sales increased 40% to $88.91 billion based on a surge in online shopping activity during the pandemic, while net income soared 100% to $5.24 billion based on growth in Amazon's high-margin cloud computing service, AWS, which boasts an operating margin of 28% compared to a 3.4% margin in the North American e-commerce segment.
2. PayPal: Keeping the competition at bay
The world is going digital, and payments are no exception. PayPal is an excellent way for investors to bet on this long-term trend because of its dominant market share in mobile payment processing. According to a 2018 survey conducted by financial services company ING, around 22% of Americans use PayPal for online payment, making it the second-most-common method after stored credit cards, which make up 45% of the total. PayPal also boasts innovative fintech products that can help it maintain its edge over rivals.
The global mobile payments market is poised to expand at a CAGR of 27% through 2025 based on the rapid growth of online retail -- as well as the digitization of other industries such as food service, transportation, and fitness. PayPal has historically held its own against competitors like Amazon Pay and Google Pay with its trusted brand image, forged through its role as the primary payment processing provider for its former parent company, eBay. Now that this exclusivity has expired, the company is ensuring its dominance in the post-eBay era by acquiring subsidiaries of its own.
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In 2019, PayPal bought Honey Science for $4 billion, giving it access to the Honey app, which allows consumers to find and apply discounts along with other money-saving tools. While the $4 billion price tag is expensive (around 20 times Honey's projected 2019 revenue of $200 million, according to Fortune magazine), the deal could create a wide range of opportunities for the combined company. For example, PayPal could potentially integrate Honey into its checkout platform to help differentiate it from competitors, or it could monetize the user data of people who shop with the app.
PayPal's net revenue soared 22% to $5.26 billion in the second quarter amid a surge of online shopping activity during the coronavirus pandemic, while net income jumped 86% to $1.53 billion. The stock boasts a P/E multiple of 94, which is significantly above the market average. But that lofty valuation seems well-deserved because of Paypal's breakneck earnings growth and convincing efforts to maintain its moat against rivals in the red-hot mobile payment processing industry.
Betting on digitization
Online shopping is a megatrend that will continue despite near-term challenges in the economy. And it is likely to create immense value for investors in the coming decades, as it gives companies better ways to provide goods and services to consumers.
While Amazon and PayPal sport massive valuations, quality often comes at a premium price. Both companies are positioning themselves for long-term success by fortifying their moats against their competition.
