After rising in value by over 600% in the last five years, share prices of financial technology stock PayPal Holdings (PYPL 0.64%) have slid almost 42.5% recently. Thanks to slowing growth stemming from its long-standing partnership ending with eBay, PayPal now trades with a price-to-earnings of 43, the lowest since nearly two years ago.
Despite this ended partnership, I believe the company offers three excellent reasons that make it a buy for 2022 -- and a great long-term holding for the next decade.
Image source: Getty Images.
1. PayPal's leadership position
Driven by its mission "to democratize financial services for people all over the world," PayPal has grown to over 400 million active accounts, making it not only a financial behemoth but one of the largest companies in the world. Thanks in part to this size, Comparably ranks the company seventh on its Top Brands in Banking and Financial Services list -- ahead of notable names like Wells Fargo, Bank of America, and Goldman Sachs.
Best of all for investors, these active accounts are still showing strong growth, rising 15% year over year for the most recent quarter. Additionally, PayPal added 1.2 million merchant accounts, bringing its total to 33 million and expanding upon its dominance in the industry.
Highlighting this leadership position, PayPal is used by more than 75% of the largest 1,500 merchants globally, giving it an unmatched reach.
Overall, PayPal generated more than $1.2 trillion in total payment volume (TPV) in the last 12 months and expects to close 2021 by recording TPV growth of 34% year over year -- even including eBay's gradual unwinding. As strong as this TPV growth remains, PayPal's long-term growth optionality may only just be starting.
2. Optionality abounds for PayPal
Growth optionality, or diversity of revenue streams, is quickly becoming integral to PayPal's long-term growth story. There are three specific growth avenues for investors to keep an eye on:
- Cross-border trade (CBT) growth
- The rise of buy now, pay later (BNPL) services
- PayPal's new digital wallet
Accounting for nearly $200 billion of PayPal's TPV in the last 12 months, CBT has quickly become essential to the stock's potential. These international sales had seen a strong surge in the previous few quarters thanks to travel and event's strong rebound in 2021.
However, thanks partly to the most recent COVID-19 variant, this CBT sales growth decelerated to 19% year over year for the most recent quarter. Ultimately, these international sales should only improve over the long term, as e-commerce rapidly becomes a global proposition for small and large merchants alike.
In September 2021, the company spent $2.7 billion on Japanese BNPL specialist Paidy. This acquisition exposed PayPal to two key areas: Japan, the third-largest e-commerce market, and BNPL, an increasingly important niche for financial companies.
While BNPL only accounted for $5.4 billion in TPV for PayPal over the last 12 months, Grand View Research expects the industry to grow by over 20% annually over the next five years.
PayPal's continued focus on its digital wallet offers investors massive optionality as it tests and adds new financial products such as its cash card, high-yield savings, and cryptocurrency accounts. Thanks to its enormous base of over 400 million active accounts, these additional product lines could add incremental sales growth while building an ever-strengthening ecosystem.
3. PayPal's massive profitability
Perhaps most importantly for investors, this leadership positioning and promising growth optionality come with substantial free cash flow (FCF) generation. Posting a 21% FCF margin, PayPal is a genuine cash cow -- and best yet, this FCF grew by 20% year over year for the most recent quarter.
PYPL Free Cash Flow Per Share data by YCharts
Additionally, as the charts above show, this steadily rising FCF comes at a freshly discounted share price. Now trading with a market capitalization, or company price tag, of roughly $220 billion, PayPal has a price-to-free cash flow (P/FCF) of 43.
While this valuation is still more expensive than the broader market's, the company's leadership position and growth optionality should help it outgrow this premium. Furthermore, compared to one of its main peers, Block, which trades at a P/FCF of 130, PayPal's growth potential comes at a significant discount.
Ultimately, PayPal's leadership position and slow and steady growth (compared to Block) could bring outperformance for investors looking out over the long term.
