The accelerating shift toward digital transactions over the past year was a boon for PayPal Holdings (PYPL -0.27%). Its value more than doubled in 2020, and in the first half of 2021, its stock has already gained 23%.
The digital payments leader has experienced accelerating revenue growth over the last year. These three catalysts could keep the momentum going and push the stock even higher.
Image source: Getty Images.
1. PayPal is launching a next-gen digital wallet
PayPal has been investing heavily in technology -- $2.6 billion in 2020 alone -- to develop new features for its growing base of active users -- 392 million at last count. Earlier during the pandemic, those expenditures led to the release of a new QR code tool for contactless checkout at retail stores, and this year, PayPal introduced the ability to pay for purchases with cryptocurrency.
The company has been on a roll lately, and it's not slowing down.
"We expect to roll out our next-generation digital wallet in Q3," CEO Dan Schulman said during May's first-quarter earnings call. He further described it as an "all-in-one personalized app" that will offer customized and unique shopping features, financial services, and new payment experiences.
"Our addressable market continues to significantly expand driven by accelerating secular trends and the proactive steps we are taking to become a full commerce and payments platform," he said.
2. Crypto comes to Venmo
Venmo is on pace to generate $900 million in revenue this year, and while that's less than 4% of PayPal's business, the ability to pay using cryptocurrency via Venmo should be a huge catalyst for the peer-to-peer payments app's growth heading into 2022.
PayPal launched "Checkout with Crypto" in the PayPal app at the end of March, and gave users the ability to buy, sell, or hold cryptocurrency in Venmo in April. During the Q1 earnings call, Schulman referenced the results of surveys that show 74% of millennials expect to use cryptocurrencies over the next few years in some way. Crypto buying has been a significant growth catalyst for Square's Cash app. Now, PayPal could see a similar result.
"About half of crypto users open their app every day," Schulman said, signaling the impact this could have to turn Venmo into a "super app," or the only financial app users need. With more than 300,000 business profiles on Venmo, PayPal sees big opportunities to further accelerate adoption of an app that posted $51 billion in payments last quarter -- an increase of 63% year over year.
3. Earnings growth is accelerating
What's most impressive about PayPal's recent business performance is the improvement in its operating margin. In the first quarter, PayPal's operating expenses increased at a much lower rate than revenue, which allowed more money to drop down to the bottom line. This was a key factor in its 84% year-over-year rise in adjusted earnings per share.
This isn't just a temporary trend. PayPal's transaction expense -- the sum of the costs it incurs when a customer makes a payment -- has declined as a percentage of total payment volume over the last three years. PayPal has also experienced slower growth in customer support expenses and has made significant headway on reducing credit losses, all of which have lowered its costs and firmed up its profits.
It's remarkable that PayPal has been able to roll out so many new features -- with more on the way -- while posting healthy increases in margins and profits.
Schulman believes these trends are sustainable. "[W]e would expect transaction expense to remain at lower levels [than] pre-pandemic, which, again, gives us the just amazing leverage that we have on this platform," he said. PayPal recently announced plans to raise its processing fees for some U.S. merchants starting in August, which will help it keep its operating margins up, and its earnings per share growing.
Why the stock is a buy
Analysts expect PayPal to report steady growth in operating margins over the next two years. And current estimates have PayPal posting EPS growth of 21.9% in 2021, 24.3% in 2022, and 24.6% by 2023.
Many tech companies sacrifice profitability to invest in growth initiatives, but not PayPal. That's why this fintech stock is still a great buy as it inches toward new highs.
