One of the greatest attributes an investor can have is patience. Patience allows you to ride out the short-term volatility of the stock market and realize long-term returns. Think about the investors who bailed on Amazon, or Apple, or Netflix early on due to losses that may have felt uncomfortable at the time. They surely wish they had a time machine so they could go back for a do-over.
PayPal: A general in the war on cash
Digital and mobile payments company PayPal is coming off its best year as a public company, returning 116% in 2020 and expanding its market lead in the online payments space. But there is far more room for PayPal to run as it continues to strengthen and add capabilities to thrive over the next decade or more and as the trend away from cash to digital payments accelerates.
PayPal added 15.2 million net new accounts in the third quarter, bringing its total to 361 million accounts, which is up 22% year over year. It did $4 billion in payment transactions, up 30%, and $247 billion in total payment volume, up 38%. Its mobile app Venmo, which allows people to send and receive money, saw a 61% year-over-year spike in payment volume to $44 billion. Venmo should be a cash cow going forward in the shift to mobile payments. Previously, it was only for person-to-person transaction, but now customers can use Venmo for merchant transactions. In addition, they can use Venmo to buy and sell bitcoin and cryptocurrencies. Moreover, PayPal has begun to roll out service where customers can pay via QR codes on their phones.
PayPal has been an earnings machine since it spun off from eBay in 2015 with consistent 15% to 20% annual revenue growth over the past few years. Plus, the company has an increasing operating margin of 17.9% in the third quarter and generated $720 million in cash flow from operations in the third quarter.
Year-to-date through the third quarter it had $4 billion in free cash flow, up 43% year over year. With these strong financials, its earnings power, and its status as a market leader in a growing industry, PayPal is going to have a long, profitable run.
Square has built an ecosystem of buyers and sellers
Square is another fintech that will reward investors for the next 10 years or more. Square started out as a company that made credit card readers for smartphones and tablets, but it has branched out into other areas of mobile payments, most notably through its Cash App and Cash Card.
The Cash App saw meteoric growth last year, generating about $2.1 billion, or about 70% of Square's revenue, in the third quarter. Cash App revenue jumped 574% year over year in the quarter as more people turned to cashless payments during the coronavirus pandemic and the number of active users climbed 25% to 30 million. The growth of the Cash App isn't likely to subside with the tailwinds of the cashless trend pushing it forward, accelerated by the pandemic and social distancing.
The Cash App is more than just a way to send and receive money; it also offers a platform to invest in stocks and bitcoin and is a bank of sorts as users can maintain an account and get direct deposit payments. It can also be linked to the Cash Card, which can be used to pay for goods and services with the Cash App balance.
But what sets Square apart is that it also serves sellers through its various merchant services, like payroll, point-of-sale register, and loans, for Square customers only, through its Square Capital arm. Now, Square is planning to launch a bank, having received federal approval for an industrial loan company (ILC) bank charter, which would allow it to offer loans beyond its current sellers to businesses and individuals. This will allow to broaden its footprint and expand its user base for its other services.
Square's stock soared 248% in 2020 and has a very high valuation as a result. It may snap back in the short term, but you can expect Square to be a major player over the long term.
These two fintechs are at the forefront of the cashless trend and would be great additions to any long-term portfolio.