Anyone who's invested in stocks over the past year knows that dramatic fluctuations are all too common. Just last year, the S&P 500 crashed as the world started shutting down in response to the coronavirus pandemic -- before roaring back in the coming months to nearly double its pandemic lows today. Certainly, the true value of companies doesn't change that much in such a short period of time. But being able to stomach volatility is the price we pay in order to achieve long-term gains.
Owning shares of high-quality businesses with competitive advantages and lots of growth definitely helps. PayPal Holdings (PYPL -1.83%) is one such company that investors should consider to ease their concerns during times of market turmoil.
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Past and present success
PayPal is one of the biggest online payment companies in the world. Since it reentered the public markets through its spinoff from eBay in July 2015, the stock has been a huge winner, rising more than 700% at Friday's prices. Its user base stood at 169 million active accounts as of June 30, 2015; today, that's grown to a whopping 392 million. Through this year's first quarter, the company has grown revenue at a rate of 18.8% over the past five years, while net income has grown even faster, at an annualized rate of 31.3%.
PayPal was a pioneer in digital payments, a shift that was only accelerated by the pandemic last year. As the world continues to move toward cashless transactions, PayPal will help spearhead the trend. In the most recent quarter, payment volume jumped 50% compared to the prior-year period, reaching a company-record $285 billion. PayPal derives essentially all of its revenue from transaction fees, so the higher the total payment volume, the better for the company. And Venmo, PayPal's leading peer-to-peer payments service, processed an impressive 63% more volume this quarter compared to Q1 2020.
The company's performance in the first quarter was so stellar that management raised its full-year 2021 guidance. Revenue is expected to grow 20%, an impressive rate for a $324 billion business. And nearly 55 million net new accounts are expected to be added this year. CEO Dan Schulman thinks the company can one day reach 1 billion daily active accounts, which shows his confidence in the expansion opportunities still left.
Competitive strengths
When the stock market goes through rough patches, PayPal's strong competitive advantages should ease investor worries. The company benefits from two major sources of strength.
First, PayPal's two-sided platform of merchants and consumers creates a powerful network effect. Merchants will only use PayPal if there are already a lot of consumers, and vice versa. This means that with more users, the ecosystem only gets stronger. As the business gains momentum and traction, it's very difficult for competitors to challenge.
Second, PayPal's success can also be attributed to intangible assets, particularly its brand and a culture of innovation. Merchants and consumers know that whenever they use PayPal's services, they are getting world-class safety, security, and transaction execution. Users trust the business with their payment needs, and that is absolutely vital.
Once PayPal customers become familiar with using the services, it becomes easier for PayPal to introduce new features. For example, the company now lets U.S. consumers buy, sell, and hold various cryptocurrencies. Recently, PayPal added QR code payments for its brick-and-mortar merchants to accept payments in-store. Furthermore, the business plans to introduce major updates to its mobile apps later this year as a way to be a one-stop super financial services application.
Keep calm and hold on
Whenever the market seems to be losing its head and other investors are panicking, it's a good idea to stick to owning high-quality businesses with a long-term mindset. PayPal's history of impressive success, continued fast growth, and key competitive advantages make it a lucrative choice for investors.
If the market's down, look no further than PayPal as a stock to own for the long term.
