The trillion-dollar club is an exclusive group of the most dominant companies in the world. And it's full of tech giants, like Apple, Microsoft, Alphabet, and Amazon. Thanks to its blowout earnings report, Nvidia is new to this list.
Many businesses have aspirations of their market caps hitting the $1 trillion mark one day, but the reality is that it's probably completely out of the cards for most. Investors who own shares in these businesses, however, would certainly see a huge boost in their portfolios' returns.
A top fintech company and leader in digital payments like PayPal (PYPL 2.90%) would have to rise roughly 1,200% to join the club. Could it be a $1 trillion-dollar stock by 2040? Let's take a closer look at whether or not this lofty goal is even in the realm of possibility.
Riding a broad secular trend
For those who aren't familiar with the business, PayPal pioneered electronic payments at its founding more than 20 years ago, making it easier for merchants to accept noncash payments from consumers. Its scale is truly eye-popping, with total payment volume of nearly $1.4 trillion in 2022, and 433 million active accounts as of March 31. These figures have steadily risen over time.
PayPal has impressive financials, producing $5.1 billion of free cash flow (FCF) last year from revenue of $27.5 billion. And this year, the leadership team expects FCF to stay consistent, projecting a total of $5 billion. That's quite a stark contrast with many of the cash-burning fintech companies out there today.
According to Grand View Research, the global digital payment market is projected to grow at 21% per year to $361 billion by 2030. This presents a meaningful growth runway for PayPal, as well as others in the space, to take advantage of.
Temper your expectations
For PayPal to join the $1 trillion club by 2040, the business's value would have to increase at a compound annual rate of 16.3% over the next 17 years or so. That would translate to a fantastic return. And because PayPal's management team is focused on continuing to execute sizable share repurchases, the stock price could climb at an even faster annualized clip should the company reach that market cap.
But I think it's best for investors to temper their expectations. In other words, I don't really see this as a likely scenario.
Since the company was spun off from eBay in 2015, PayPal shares are up only about 88%. This performance is worse than those of both the S&P 500 and Nasdaq Composite Index during the same time period. It's never a good idea to assume that future results will resemble the past, but this doesn't bode well for the return prospects of the stock, especially as PayPal becomes a larger company and its growth opportunities naturally become limited.
There are some risks to keep in mind as well, most notable of which is competition. On the consumer side, PayPal's Venmo has to go against Block's popular Cash App, as well as numerous other online banking and brokerage services. And on the merchant side, PayPal's Braintree competes with the likes of Adyen, Shopify, and privately owned Stripe.
And even leading tech firms like Apple and Alphabet are making noticeable inroads into digital wallets. Their advantage is that they control smartphone operating systems, which could position their services ahead of PayPal's.
Maybe this heightened competition can help explain why PayPal's gross margin has shrunk over the past several years, while its operating margin has shown no signs of economies of scale.
Right now there are no pure-play payments businesses in the trillion-dollar club, but I suspect that Visa or Mastercard would get there before PayPal does. Those two card networks have a duopoly position in their industry, and are the best positioned to continue benefiting from the world's transition to digital transactions.
