You've decided to start investing for the long term in order to make progress toward your financial goals. That's awesome news. So where do you begin?
The stock market can be overwhelming for newbies, but there are some solid foundational stocks that you should consider adding to your portfolio to get things going. Here's why PayPal Holdings (PYPL -1.14%) is a great stock to buy and hold even if you only have $300 to invest.
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Pioneering a cashless world
Society is increasingly transitioning away from cash and toward digital payments, and PayPal is at the forefront of this movement. The company provides a broad range of tools for merchants to accept payments and for individuals with their daily financial lives. Over the past five years, the booming fintech has grown quarterly sales and profit 135% and 267%, respectively. And the stock has followed this strong fundamental performance, soaring almost six-fold during this time.
Boosting PayPal's success has been the rise in online shopping. While the company will no longer be a payment solutions provider for eBay users, its products and services are definitely needed in today's economy. The pandemic only accelerated the boom in e-commerce, pushing its share of total global shopping from 14% in 2019 to 17% in 2020. This trend is likely to continue in the years ahead, supporting demand for PayPal.
In many parts of the world, cash is still the primary method of transacting today. And the fact that roughly 30% of adults worldwide still don't have an account with a financial institution or a mobile money provider is eye-opening. Because PayPal is currently available in 200 markets and supports 25 different currencies, it's well-positioned to take advantage of rising incomes and consumers joining the financial system.
Benefiting from strong competitive advantages
A business wouldn't be great without the presence of a competitive advantage. In PayPal's case, it's powered by dominant intangible assets, including a strong brand and an innovative culture. The company is globally recognized as a leader in safety, security, and speed when it comes to payments, factors that can't be compromised.
Additionally, PayPal's innovation engine is always firing, as it has proven the ability to continue introducing new features to attract more users and grow transaction volume. Last month, the company's flagship mobile app received a major upgrade, adding capabilities like bill pay, access to a high-yield savings account, early direct deposit, and even shopping deals and rewards. CEO Dan Schulman's goal is for PayPal to be a one-stop financial tool for individuals.
The competitive position is also bolstered by network effects, where the addition of more users increases the value for everyone else. Just last quarter, PayPal processed an incredible $311 billion in total payment volume (TPV). And it now counts 371 million active individual accounts and 32 million active merchant accounts. These are staggering figures by any measure, and they underscore how robust an ecosystem PayPal has built.
The company is always looking for ways to strengthen its payments platform and drive higher engagement, sometimes utilizing acquisitions to do so. PayPal previously paid $4 billion for Honey, an online tool for shopping deals and rewards. And just this year, it acquired Paidy, a leading Japanese buy now, pay later platform, for $2.7 billion. Rumors have swirled about a potential $45 billion tie-up with Pinterest as well, which would attract users of the digital visual-board social-media company, who are earlier in their shopping journey, into PayPal's ecosystem. Although PayPal ultimately said that it was not interested, it does hint at the wide possibility Schulman sees in blending the fintech world with e-commerce.
Outstanding metrics support valuation
PayPal sports some remarkable financial metrics. In the most recent quarter, an adjusted operating margin of 26.5% and an adjusted net income margin of 21.8% demonstrate how firmly profitable this enterprise is. And since the business already has the technological infrastructure in place to process massive numbers of transactions, the capital required to continue growing is minimal. PayPal invests 4% of sales in any period back into the company, which is why its free cash flow margin was a stellar 17% in the second quarter.
These financial attributes, coupled with the company's consistent and steady revenue and profit growth over the past several years, support PayPal's forward price-to-earnings ratio around 47. The stock is also down more than 20% from its recent high in late July, giving investors a chance to buy on weakness.
PayPal is a superb business, and I believe it's one of the best stocks to buy with $300 today.
