The S&P 500 dropped into bear market territory more than one year ago, dragging PayPal Holdings (PYPL 1.96%) down with it. The fintech saw its share price fall 80% amid the broader downturn, its sharpest decline as a public company. That sell-off was brought on by several headwinds, including an inflation-fueled deceleration in consumer spending, unfavorable foreign exchange rates, and geopolitical conflict.
Last year, those challenges forced PayPal to remove its medium-term financial targets, and they led to a series of lackluster financial results. But economic headwinds are a temporary problem, so patient investors should view the drawdown as a buying opportunity. PayPal remains well-positioned to grow its business, and shares currently trade at a bargain price.
Here's what investors should know about this growth stock.
PayPal has a durable competitive advantage
PayPal benefits from a durable competitive advantage arising from scale, data, and brand authority. The company operates one of the largest payment networks in the world, with 433 million active accounts, but the two-sided nature of that network is particularly noteworthy. Most payment service providers work exclusively with merchants, but PayPal provides financial services to merchants and consumers.
This means PayPal has cultivated trust with buyers and sellers, and buyers tend to spend more when they feel secure. According to research from Nielsen, PayPal is associated with higher conversion rates, more repeat buyers, and a better buyer experience compared to other checkout options. But PayPal's two-sided network also allows the company to collect data from both sides of the transaction, which means the company has a deeper understanding of consumer spending habits compared to many peers. That makes PayPal good at identifying fraud. In fact, management says the company has the highest authorization rates and the lowest loss rate in the industry.
PayPal is the market leader in online payment processing
PayPal has the kind of scale, data, and brand authority that few payment service providers possess, and those assets make its digital wallets and checkout solutions compelling products for buyers and sellers. PayPal is the most accepted digital wallet in North America and Europe, and it ranked as the second most downloaded digital wallet worldwide last year, according to Apptopia.
More broadly, PayPal holds an industry-leading 42% market share in online payment processing software. That means the company is well-positioned to benefit as online shopping becomes more prevalent. For context, eMarketer estimates that retail e-commerce sales will increase at 9% annually through 2026. Investors can reasonably expect PayPal to grow its total payment volume at least that quickly.
PayPal is working to gain share at physical points of sale
PayPal undoubtedly has a strong presence online, but the company is also working to expand its footprint at physical points of sale (POS). It offers PayPal- and Venmo-branded credit and debit cards, and it recently debuted the PayPal Zettle Terminal in the U.S., a POS system that helps small businesses manage everything from orders and inventory to payments and reporting.
PayPal also deepened its ties with Apple last year. In the U.S., Apple's Tap to Pay technology is now available to merchants using the PayPal and Venmo iOS apps, and Apple Wallet now supports PayPal- and Venmo-branded payment cards. This means people can use those cards to fund purchases anywhere Apple Pay is accepted. That is particularly noteworthy because Apple Pay is the most popular in-store mobile payment option among U.S. consumers.
PayPal stock has never been cheaper
Global digital payments revenue is projected to increase at 21% annually through 2030, according to Grand View Research, and PayPal should benefit handsomely from that trend. Investors can reasonably expect low double-digit revenue growth through the end of the decade, a somewhat conservative estimate given that revenue increased at 15% annually over the last five years.
Shares currently trade at 2.5 times sales, well below the five-year average of 7.2 times sales. In fact, PayPal has never been cheaper than it is today. That's why this growth stock is worth buying.
