As far as fintech goes, PayPal Holdings (PYPL 0.79%) is a dinosaur. It existed before fintech, or financial technology, was even a category, which means its high-growth stage is probably over. It also means that there are many new companies in the field, threatening PayPal's dominance. Does that mean PayPal is a risky investment at this point?
Driving sales during tough times
First, a little perspective on the advantage of experience.
No one could have known how COVID-19 would ruin economies way back in early 2020. But shifting consumer trends meant that once the pandemic came, businesses were ready. While many small businesses were devastated, companies that were fully on board with the digital revolution were able to continue making sales while stores were closed.
PayPal was a force in processing payments for online businesses while doors were shuttered, and it also had high growth in its peer-to-peer payments category. So much so that total payment volume increased 36% during the third quarter, the highest increase in the company's history, and in October, already into the fourth quarter, PayPal had its highest-volume day ever. Transactions grew 30% to $4 billion, the most transactions ever.
The fintech company has a history of acquiring complementary businesses, such as Venmo and Honey, a recent addition that finds deals for shoppers. It also has strong partnerships with companies that feature it as an easy payment option. And merchants enjoy its range of payment solutions that simplify their operations. These features help it stand out from an increasingly crowded space.
Facing increased competition
Everyone seems to be getting onto the fintech bandwagon these days, and traditional financial services such as Visa and American Express have also launched small- business packages for in-store and digital merchants. Square is another innovative fintech that offers a suite of small business solutions and is seeing tremendous growth. Revenue increased 148% in the third quarter.
But Square is nowhere near PayPal's size. PayPal sales in the third quarter were almost double Square's, and PayPal's total payment volume of of nearly $250 billion dwarfs Square's $31.7 billion in seller gross payment volume and $2.9 billion in Cash App GPV.
PayPal has established itself as the leader in the field and continues to launch new products and services to stay ahead. It continued to expand its network during the pandemic, adding millions of new merchants and launching the Venmo credit card. It also launched "buy now, pay later" interest-free payment options and added a cryptocurrency trading feature to the PayPal digital wallet.
Building for the future
CEO Dan Shulman said, "The digitization of the global economy, combined with the rise of digital wallets, will drive our growth over the next decade." In particular, PayPal is expecting exciting progress from the Venmo credit card, which combines the Venmo digital wallet with physical stores through the card's QR code.
PayPal is expecting revenue to increase 20% to 25% in the fourth quarter and TPV and earnings per share to grow double-digits. These are strong numbers, but they don't match growth from newer start-ups like Square. But PayPal's revenue far exceeds Square's, and sales growth around 20% is healthy for a company its size. That typically means less vigorous stock growth, but lower risk. This explains why Square is up more than 200% year to date and PayPal is up about 100%, which isn't too shabby. But Square trades at 330 times trailing 12- month earnings, while PayPal trades at 81 times earnings.
PayPal has an established brand and high long-term growth prospects. It faces some competition, but it stands out with its large network and innovative payment solutions. I would say that PayPal is a low-risk stock with the potential for high gains for shareholders.