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This Low-Risk Stock Is a Long-Term Winner

By Trevor Jennewine - Jun 26, 2021 at 1:26PM

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PayPal is riding the tailwinds of global digitization.

There's no such thing as a risk-free stock. That said, there are ways a company can protect itself. A trusted brand can make it an easy choice for busy consumers, and a massive market opportunity can ensure it always has room to grow. Meanwhile, strong competitive advantages can help fend off competitors.

PayPal Holdings (PYPL 0.41%) is a great example of all three. This payments innovator has a history of outperformance, surging more than 700% over the past five years. But it still looks like a long-term winner today. Here's why.

Woman making online purchase.

Image source: Getty Images.

Competitive advantage

PayPal operates in over 200 countries and regions, and its digital payment platforms boast 392 million active accounts, including 31 million merchants. That scale is a significant advantage, and it powers the network effect that drives PayPal's business. Here's how it works: As more consumers use PayPal, merchants benefit from a growing number of potential buyers; and as more merchants join PayPal, consumers benefit from a growing number of accepting sellers. This self-reinforcing cycle is a powerful growth driver.

To add, PayPal's scale has also created operating leverage. In other words, the company has become more efficient over time, as its operating margin has expanded 300 basis points since 2016. That uptick in profitability means PayPal can invest more aggressively in growth, giving it an advantage over less established rivals.

Finally, PayPal has spent the past 23 years building a trusted brand name, and trust is a critical part of any financial transaction. For instance, PayPal's purchase protection policy covers both buyers and sellers, allowing them to use the platform without risk. That should continue to drive growth in the years ahead.

Global digitization

Digitization is reshaping the world. More people are connecting to the internet, shopping online, and adopting digital wallets. Collectively, those trends create a big opportunity for fintech companies like PayPal.

According to a report from WorldPay, digital wallets accounted for 45% of e-commerce payments and 26% of in-store payments in 2020. But those figures are expected to reach 52% and 33%, respectively, by 2024. Notably, PayPal launched several new products last year that play into those trends.

For instance, the company introduced quick response (QR) code payments in May, allowing consumers to make in-store purchases using the PayPal and Venmo mobile apps. The product has already gained significant traction. During the Q1 earnings call, CEO Dan Schulman said: "We now have nearly 1 million merchants accepting our QR codes."

Likewise, PayPal partnered with Visa to launch the Venmo credit card in October. This allows consumers to fund purchases with their Venmo account balance, and it enhances PayPal's ability to monetize the ultra-popular mobile app.

Looking ahead, PayPal should benefit in other ways as well. For instance, in 2020, the company acquired Honey, a rewards platform that helps consumers save money when they shop online. PayPal believes this will drive sales and customer engagement for its merchants while enhancing the shopping experience for consumers.

Given those benefits, it's easy to imagine the financial impact. By integrating Honey into its platform, PayPal positions itself further upstream in the customer journey, meaning it will help shoppers find products, not just buy them. And by playing that part, PayPal should see an uptick in total payment volume, which would boost revenue.

Financial performance

PayPal's strong competitive position has naturally led to impressive financial results. Since 2015, active accounts have surged 117%, as digital commerce and electronic payments have become more popular with consumers.

Over the same period, transactions per active account also jumped 50%, compounding the benefits of strong user growth. This metric is particularly important, as it approximates user engagement. Put another way, more consumers are joining PayPal and they are using PayPal's products more frequently.

That dynamic has helped PayPal grow its business quickly.

Metric

2015

Q1 2021 (TTM)

CAGR

Revenue

$9.2 billion

$22.9 billion

19%

Free cash flow

$1.8 billion

$5.3 billion

23%

Source: PayPal SEC Filings. TTM: trailing 12 months. CAGR: compound annual growth rate.

Looking ahead, PayPal's big market opportunity, strong competitive position, and history of solid execution should make it a long-term winner. Moreover, the world is rapidly adopting digital solutions like e-commerce and electronic payments. In other words, PayPal's business appears to be on the right side of purchasing trends, and I think that limits downside for long-term investors.

Trevor Jennewine owns shares of PayPal Holdings and Visa. The Motley Fool owns shares of and recommends PayPal Holdings and Visa. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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