PayPal Holdings (PYPL 1.44%) hasn't exactly been a top-performing stock, with shares down by 17% over the past year and more than 35% below their all-time high. There are certainly some good reasons for this -- for example, with COVID-19 restrictions gradually lifting throughout 2021, there is an expectation that in-person shopping might take some retail market share back from e-commerce, which is where PayPal shines.
Having said that, it appears that the sell-off might have gone on a bit too long at this point. Here's a rundown of why PayPal is such a powerful fintech behemoth and how much more room there could be to grow the business in the years ahead.
PayPal is a fintech powerhouse
If you glance at PayPal's recent results, it may seem odd that the stock is down 35% from the highs. The company is now processing over $1.2 trillion in payment volume as of the third quarter, which is up by 26% year-over-year on top of an already pandemic-boosted third quarter of 2020. There are now 416 million active accounts, and the average account holder completes 10% more transactions on PayPal's platforms than a year ago. Revenue growth is well in the double digits and is up 25% year-over-year excluding the planned wind-down of its eBay (EBAY 1.29%) relationship.
What's more, not only is PayPal massive and growing impressively, but the company is very profitable. It generates free cash flow at the rate of about $5 billion annually, and adjusted earnings have grown at a 21% annualized pace over the past couple years. This means that unlike most other fast-growing technology companies, PayPal is producing billions of dollars that it can reinvest into the business, acquire other companies, or return to investors.
Could there still be room to grow?
To be sure, $1.2 trillion in annualized payment volume and 416 million active users are both enormous and impressive numbers. But don't make the mistake of thinking PayPal is a completely "mature" business just yet.
For one thing, the cashless payment market is estimated to be roughly $45 trillion in annualized volume worldwide. And if you include things like person-to-person, business-to-business, and cross border money transfers, there's $185 trillion flowing around the world each year. To put it mildly, PayPal could still multiply its volume several times and still have a relatively small market share.
Second, while PayPal has done a good job of monetizing its core user base, the same isn't true when it comes to Venmo -- yet. The company is still in the relatively early stages of figuring the best ways to generate revenue from the Venmo platform, and as it does so, it could translate into huge bottom-line profit growth.
PayPal also continues to roll out new use cases for its platforms that should help boost user engagement and payment volume. For example, Amazon (AMZN 2.27%) plans to allow customers to pay with Venmo on its marketplace starting this year. Walmart (WMT 0.15%) has added PayPal capability at its checkouts. Money-raising platform gofundme recently rolled out PayPal checkout and plans to add Venmo shortly.
Finally, PayPal is gradually becoming much more than a payments company. Recent acquisitions such as discount-seeking platform Honey have helped PayPal expand its services, and with billions in cash flow each year, there will likely be more acquisitions ahead. Plus, PayPal invests in other companies, both large and small, which could also help drive shareholder value over time. It has substantial stakes in MercadoLibre (MELI 1.50%) and Uber (UBER 2.04%), just to name a couple examples.
A great fintech stock for 2022 and beyond?
In full disclosure, I don't own shares of PayPal in my portfolio right now. However, after the recent declines, the fintech giant has rocketed to the top of my buy list as we enter 2022. I believe PayPal has years of market-beating return potential in front of it and could be a bargain after the recent correction. As 2022 gets under way, PayPal is at the top of my buy list, and I plan to add shares to my portfolio shortly.