Throughout the pandemic, the federal government has issued several stimulus payments and boosted unemployment benefits, while the Federal Reserve has kept interest rates near historic lows and spent trillions buying treasury bonds and mortgage-backed securities.
These initiatives were meant to stabilize the economy by putting more money in the hands of consumers. Unfortunately, that rapid proliferation in money supply has stoked fears about inflation, and the stock market has taken a hit -- especially tech stocks.
Even so, investors should consider buying PayPal Holdings (PYPL 1.57%). Its business model could actually help hedge against inflation, and the company recently reported impressive financial results for the first quarter of 2021. Here's what investors should know.
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PayPal's strongest quarter ever
PayPal provides financial solutions for consumers and merchants, facilitating digital payments both in stores and online. During 2020, the pandemic supercharged its business, but the company hasn't lost momentum.
CEO Dan Schulman started the first-quarter earnings call by telling investors, "We just completed our strongest quarter ever." Growth in active accounts and total payment volume (TPV) accelerated to 21% and 50%, respectively. That drove revenue of $6 billion for the quarter, up 31%, and free cash flow of $1.5 billion, up 27%.
Those latest quarterly results fit PayPal's long-term trend of strong financial performance.
|
Metric |
2017 |
Q1 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Revenue |
$13.1 billion |
$22.9 billion |
19% |
|
Free cash flow |
$1.9 billion |
$5.3 billion |
38% |
Data source: PayPal SEC filings. TTM = trailing 12 months. CAGR = compound annual growth rate.
Notably, PayPal earns revenue as a percentage of payment volume. That means inflation could theoretically boost the company's top line -- as consumer prices increase, PayPal's cut would increase, too. But even if that doesn't play out, this fintech stock still looks like a good long-term investment.
New products and partnerships
During the Q1 earnings call, Schulman provided an update on PayPal's $110 trillion market opportunity. Specifically, he noted that the success of several new products and partnerships was driving the expansion of that figure.
For instance, PayPal launched QR code payments in May 2020, enabling consumers to make in-store purchases with a smartphone. By the end of the year, over 600,000 merchants accepted PayPal and Venmo QR codes. Schulman noted strong momentum during Q1, with one new business adopting the service every 28 seconds. In total, the company says, nearly 1 million merchants now accept PayPal and Venmo QR codes at checkout.
PayPal also recently partnered with financial service provider Fiserv, expanding its QR code service to Clover point-of-sale (POS) systems. Last year, Fiserv merchants using the Clover POS system facilitated over $135 billion in payments, putting PayPal in front of another big opportunity.
In the last 12 months, PayPal also launched several other products to drive user engagement. For instance, consumers can now buy and make purchases with cryptocurrency. PayPal also introduced the Venmo credit card and a buy now, pay later (BNPL) option. So far, the results are promising, as payment transactions and transactions per active account both accelerated in Q1.
|
Metric |
Q1 2019 |
Q1 2020 |
Q1 2021 |
|---|---|---|---|
|
Payment transactions growth (YOY) |
28% |
15% |
34% |
|
Transactions per account growth (YOY) |
9% |
4% |
7% |
YOY=year over year. Data source: PayPal SEC filings.
PayPal has formed a partnership with the world's largest e-commerce retailer: Alibaba Group Holding. According to Schulman, the agreement "will enable hundreds of millions of consumers outside of China to shop across Alibaba sites in China." This represents a significant opportunity. Case in point, Alibaba's gross merchandise volume (GMV) was more than double Amazon's in 2020.
PayPal has also formed a partnership with fintech company FlutterWave in Africa, increasing merchant access to PayPal consumers. Notably, e-commerce adoption in Africa is far lower than it is in developed countries like the U.S. and China, giving PayPal a chance to take share in that emerging market.
The future looks bright
PayPal plans to launch its next-generation digital wallet in the third quarter this year. According to Schulman, the app will be an all-in-one tool that provides consumers with customized shopping experiences and financial services. Investors should pay attention to this situation, as it could mark an inflection point for the fintech company.
So what's the takeaway? PayPal continues to strengthen its global network, successfully driving engagement and growth across its payments ecosystem. And with the share price trading roughly 20% below its 52-week high, now looks like a good time to buy this growth stock.
