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1 Growth Stock to Buy and Hold Forever

By Trevor Jennewine – Aug 1, 2021 at 6:45AM

Key Points

  • Wall Street wasn’t impressed with PayPal’s second-quarter earnings, but investors shouldn’t sweat the short-term noise.
  • PayPal is executing on an ambitious growth strategy, and the company has built a strong moat around its business.
  • Over the long term, PayPal has delivered an impressive financial performance.

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Despite the recent sell-off, PayPal's future still looks bright.

Earlier this week, PayPal Holdings (PYPL -0.83%) took a hit after releasing its second-quarter earnings report. Revenue came in at $6.24 billion, roughly $30 million short of Wall Street's forecast, and PayPal stock dropped 8% after hours.

Those losses certainly sting in the short term, but it's best not to overreact. Instead, take a step back and consider the big picture. From my perspective, PayPal still looks like a smart long-term investment.

Here's why.

Woman making online purchase.

Image source: Getty Images

Big market opportunity

PayPal's mission is simple: democratize financial services. To that end, its fintech platform connects buyers and sellers in over 200 markets, enabling online, mobile, and in-person payments. It also facilitates peer-to-peer transfers through Xoom and Venmo, and provides personalized shopping experiences through the Honey platform.

In short, PayPal's business model sits at the intersection of two major trends: digital payments and e-commerce. And both are gaining traction rapidly.

In fact, data from Worldpay indicates that digital wallets will capture 52% and 33% of online and in-store payment volume, respectively, by 2024. And global e-commerce sales are expected to rise at 13% per year over the same period, according to eMarketer.

So how big is PayPal's market opportunity? Management puts it at $110 trillion in total payment volume (TPV). By comparison, PayPal facilitated $1.1 trillion in TPV over the last 12 months -- roughly 1% of its addressable market. That leaves this fintech company with plenty of room to grow.

Woman using a QR Code to make a purchase with her smartphone.

Image source: Getty Images

Ambitious growth strategy

Recently, PayPal hit the accelerator on its growth strategy. In the last few years, the company has made several acquisitions, and debuted a range of new products and services, each of which enhances its value to buyers and sellers.

For instance, PayPal launched support for cryptocurrency last year, and now allows mobile users to buy, sell, and fund purchases with tokens like Bitcoin. It also introduced a Buy Now, Pay Later solution (Pay in 4), providing consumers with an interest-free financing option at checkout. In both cases, these services have boosted engagement.

The company is also growing Venmo aggressively. In 2020, PayPal partnered with Visa to launch the Venmo credit card. And earlier this year, the company introduced business profiles on Venmo, allowing merchants to sell through the platform. Collectively, these moves extend PayPal's ability to monetize the popular mobile app, which now has over 76 million active accounts.

More recently, the company launched PayPal Zettle in the United States. This platform helps merchants manage sales, reporting, and inventory across physical and digital locations. And it expands PayPal's in-store presence, building on the QR Code payment feature it debuted in 2020.

Finally, PayPal recently acquired rewards platform Honey, return solutions provider Happy Returns, and dispute management specialist Chargehound. Each of these mergers extends PayPal's ability to participate in commerce. For instance, Honey's platform allows the company to engage consumers during the discovery process (i.e. pre-purchase), and Happy Returns allows PayPal to offer services post-purchase.

Collectively, these innovations and acquisitions should help the company capture more of its massive addressable market.

Competitive advantage

PayPal has two key advantages. First, the company has built a widely recognized and trusted brand. PayPal offers seller protection and fraud prevention services at no cost -- no other payments company does that. PayPal also offers purchase protection to buyers, allowing them to use its digital and mobile wallets without risk.

That advantage has brought 403 million active users to its platform, helping PayPal achieve incredible scale. And that scale is the driving force behind the company's second competitive advantage: a strong network effect.

Specifically, as more consumers join PayPal, merchants benefit from a wider range of potential buyers; and as more merchants join PayPal, consumers benefit from a greater range of retailers. That virtuous cycle has been a powerful tailwind recently, as evidenced by PayPal's solid financial performance.

Metric

Q2 2017 (TTM)

Q2 2021 (TTM)

CAGR

Revenue

$11.8 billion

$23.8 billion

19%

Free cash flow

$2.7 billion

$4.8 billion

15%

Data source: PayPal SEC filings, Ycharts. TTM = trailing-12-months. CAGR = compound annual growth rate.

Here's the bottom line: PayPal has a big market opportunity and an effective growth strategy. More importantly, this fintech giant has built a strong moat around its business, making it virtually impossible for a rival to dethrone the company. Collectively, these details form a solid investment thesis. That's why I plan to hold this growth stock forever.

Trevor Jennewine owns shares of PayPal Holdings and Visa. The Motley Fool owns shares of and recommends Bitcoin, 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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Stocks Mentioned

PayPal Holdings Stock Quote
PayPal Holdings
PYPL
$80.08 (-0.83%) $0.67
Visa Stock Quote
Visa
V
$213.79 (0.97%) $2.06
Bitcoin Stock Quote
Bitcoin
BTC
$16,547.27 (-0.29%) $-47.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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