The consumer price index (CPI) surged 7.5% in January, marking the largest year-over-year increase in inflation since 1982. That data has investors worried, as it may cause the Federal Reserve to raise interest rates more quickly than expected. Generally speaking, rising interest rates cause economic contraction by making it more costly to borrow money. In turn, that typically depresses corporate revenue and earnings growth, which explains why investors are pulling money out of the stock market.
However, those macroeconomic headwinds are temporary, and the indiscriminate sell-off in growth stocks creates an opportunity for long-term investors. For instance, shares of PayPal Holdings (PYPL -3.68%) and Twilio (TWLO -3.32%) currently trade 63% and 55%, respectively, below their all-time highs. But the future still looks bright for both companies.
Here's what you should know.
1. PayPal Holdings
PayPal is a powerhouse in the fintech space. Its arsenal of products includes omnichannel commerce software and payment processing services for merchants, as well as a suite of mobile apps and shopping tools for consumers. More importantly, the company has built a reputable brand, and it has become a key enabler of e-commerce. In fact, over 75% of the largest 1,500 businesses offer PayPal at checkout, making it the world's most accepted digital wallet.
To maintain that edge, PayPal has rolled out a number of new products in recent years, including crypto brokerage services, QR Code payments, and "buy now, pay later." The company has also expanded partnerships with key players in the commerce industry, bringing its digital wallet to Roku, Salesforce, and Instacart. Additionally, Venmo recently launched on Booking Holdings' travel marketplace, and it's set to go live on Amazon sometime this year. Those moves have helped the company grow and engage its user base.
In 2021 PayPal reached 426 million active accounts, up 13%, and transactions per active account hit 45.4, up 11%. In turn, total payment volume (TPV) soared 33% to $1.2 trillion, revenue jumped 18% to $25.4 billion, and free cash flow rose 9% to $5.4 billion. All things considered, those numbers look pretty good in an inflationary environment.
Even so, PayPal has only scratched the surface of its potential. The company puts it addressable market at $110 trillion -- 88 times its total payment volume in 2021 -- and management believes revenue will reach $50 billion by 2025, implying 18% annualized growth over the next four years. And after the recent sell-off, due in part to weak first-quarter guidance, PayPal stock currently trades at 5.3 times sales -- far cheaper than its average valuation of 8.8 times sales over the past five years. That's why now looks like a good time to buy a few shares.
In today's connected world, consumers have more choices than ever before -- and if they aren't satisfied with a product or service, they can easily share that opinion with the world through social media. So enterprises that hope to build and maintain loyal customer bases must provide personalized experiences at every opportunity. And Twilio specializes in data-driven communication.
Specifically, Twilio's platform comprises a suite of tools that help developers add features like text, voice, and video to their own applications. And to supercharge that value proposition, the company acquired customer data specialist Segment in 2020. As part of Twilio, Segment's technology helps businesses collect data, surface insights, and create personalized communications.
In 2021, the International Data Corporation once again recognized Twilio as the industry leader in the communications platform as a service space, citing a broader product portfolio and a more effective growth strategy than any rival. Better yet, the report notes that Twilio is growing more quickly than the industry average, meaning the company is taking market share.
In the third quarter, Twilio surpassed 250,000 active customer accounts, growing its clientele by 20%. And the average customer spent 31% more over the last 12 months, evidencing the stickiness of its platform. In turn, revenue skyrocketed 65% to $2.5 billion. On a less optimistic note, Twilio remains unprofitable on a GAAP basis, and the company generated negative free cash flow $88.3 million over the past year. But Twilio has a strong balance with $5.4 billion in cash and short-term investments, so it can afford to burn money while its business scales.
On that note, the company puts its addressable market at over $100 billion by 2023, leaving plenty of room for future growth. And management has demonstrated its ability to innovate and execute -- most recently with the launch of Twilio Engage, an omnichannel marketing platform that helps clients create personalized ad campaigns. Going forward, as more enterprises strive to better connect with consumers, Twilio's clientele should continue to grow. And with the stock trading at 12 times sales -- well-below its five-year average of 16.4 times sales -- now looks like a good time to buy.