I always ensure my investment portfolio has several growth stocks. While the bulk of my holdings consist of dividend-paying companies that yield a steady stream of passive income, the growth component contributes to stronger returns over time. There are dominant businesses out there riding tailwinds and important trends that can enable long-term growth.
Thanks to the pandemic, cloud computing, online payments, and social media have become big winners in the last two years as the world flocks onto the digital bandwagon. PayPal (PYPL 0.97%), a financial-technology company with a payments platform connecting vendors and customers, has been one of the biggest beneficiaries of the growing number of people transacting and interacting online.
But the payment-portal provider's shares declined just under 20% in 2021 as investors become wary of ballooning growth stock valuations. The company is currently worth around $222 billion, but I believe there are many reasons why PayPal could eventually be a trillion-dollar stock.
Growth accelerated by the pandemic
PayPal's total payment volume (TPV), a measure of all funds flowing through its platform, has enjoyed a yearslong streak of double-digit growth. For the third quarter, TPV grew 26% year over year to $310 billion, and management expects this metric to be up 33% to 34% for the full year with net new accounts rising approximately 55 million.
PayPal closed the latest quarter with 416 million active accounts. Like TPV, the company's user base has also been increasing at a rapid pace quarter after quarter. Not only are more people joining the company's platform, but they're also using it more often with 44.2 transactions per active account, up 10% year over year.
PayPal had strong financials even before the onset of the pandemic. From 2016 through 2020, its revenue nearly doubled from $10.8 billion to $21.4 billion. Operating leverage helped the company triple its net income over the same period.
Its momentum continued into 2021 with the top line climbing 20.3% to $18.5 billion in the first nine months of the year. Net income jumped 27.8% year over year to $3.4 billion.
PayPal is also consistently free-cash-flow positive, generating an average of $4.4 billion annually in 2018 through 2020. Year to date, free cash flow stood at $3.9 billion.
Shrewd business initiatives
While the pandemic has undoubtedly boosted PayPal's business, the company has also undertaken savvy initiatives to further grow its share of the digital payments pie. For example, it added to its cryptocurrency offerings by acquiring Curv, an Israeli company, in March 2021.
Curv is a provider of cloud-based infrastructure for digital assets, and PayPal is leveraging this deal to grow its cryptocurrency capabilities. Less than half a year after the Curv acquisition, the company announced a new service in the U.K. that allows customers to buy, hold, and sell cryptocurrencies through their accounts, expanding the service that used to be offered only to U.S. customers.
PayPal has also hopped onto the buy now, pay later (BNPL) bandwagon with the introduction of its own version of this service late last year. To make it even more attractive, the company has waived late fees on its BNPL products globally.
The BNPL business looks promising with more than 9.5 million customers signing up in the year ended Sept. 30. Around 950,000 merchants have taken up the service over the same period. And PayPal acquired Japan-based Paidy most recently for about $2.7 billion. Paidy is a major BNPL player in Japan with more than six million registered users and 700,000 merchants. This deal extends PayPal's reach into the world's third-largest e-commerce market.
Then, there's also PayPal's tie-up with e-commerce giant Amazon to enable U.S. customers to pay with their Venmo digital wallets this year. This collaboration will help the company bring in more accounts, adding to the company's list of partnerships that include Walmart and Booking.com.
Even at its industry-leading scale, PayPal has demonstrated its ability to continue deliver strong top and bottom-line growth, taking advantage of the tailwinds brought on by the pandemic. Investors should view the recent decline in PayPal stock as an opportunity to start or build on their long-term holdings in a company with a robust track record.