Warren Buffett once gave this advice: "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." Investors should make those words their mantra. When a stock with a competitive moat and solid growth prospects trades at a reasonable valuation, the result is a no-brainer buying opportunity.
PayPal (PYPL 1.32%) and Etsy (ETSY 0.25%) fit that definition perfectly. They have strong footholds in their respective industries, and shares are reasonably priced in both cases. Investors with $2,000 available to spend that isn't needed to pay monthly bills, reduce short-term debt, or bolster an emergency fund, might want to consider splitting the money evenly between these two no-brainer growth stocks.
NASDAQ: PYPL
Key Data Points
1. PayPal: The leader in online payment processing
PayPal operates one of the largest payment networks in the world, with 431 million active accounts (including 35 million merchants), but what truly sets it apart from other payment service providers (PSPs) is the two-sided nature of its network. While most PSPs work only with merchants, PayPal provides financial products to merchants and consumers, which makes it possible to collect data from both sides of any given transaction.
So what? That data advantage means PayPal has a better understanding of consumer spending habits than most other PSPs, and that translates into more meaningful shopper insights and better fraud protection for merchants. Indeed, PayPal has the highest authorization rates and lowest loss rates in the industry, according to management, so merchants have naturally gravitated toward its checkout solutions. PayPal is the most accepted digital wallet in North America and Europe, and its market share in online payment processing is nearly twice that of its closest competitor, Stripe.
Leadership in online payments is central to the investment thesis. Global retail e-commerce sales are expected to increase by 8% annually through 2030, and PayPal is perhaps better positioned to benefit than any other PSP. But the company also has opportunities in in-store payment processing and value-added services, and PayPal is making progress on both fronts. Its technology is now integrated into 2,500 physical point-of-sale systems across 20 different merchants, and value-added services revenue rose 37% in the second quarter, easily outpacing total revenue growth of 7%.
Given those adjacent opportunities, investors can reasonably expect PayPal's revenue to grow slightly faster than 8% annually through the end of the decade. That makes its current valuation of 2.4 times sales look relatively cheap, especially when compared to the three-year average of 7.9 times sales. That's why now is a great time to buy PayPal stock.
NYSE: ETSY
Key Data Points
2. Etsy: An e-commerce company unlike any other
Etsy owns a family of e-commerce marketplaces, the best known of which is the namesake Etsy platform, a digital shopping destination focused on artisanal, vintage, and often customizable goods. The company has separated itself from a sea of competition by catering to small sellers and tailoring its platform to non-commoditized products across a broad range of categories, such as apparel and home décor. Buyers are unlikely to find a similar shopping experience elsewhere.
Etsy will never possess the mass appeal of Amazon, but its focus on unique and bespoke inventory is clearly resonating with consumers. Case in point: Etsy is the sixth-most-visited online marketplace in the world. That alone is a compelling investment thesis. Etsy is already well-positioned to benefit from the secular shift toward e-commerce. But the company is also pumping money into product development to increase its market share, and central to its sensible product roadmap is improving search and discovery.
With over 115 million items on the marketplace, the inherent difficulty of categorizing non-commoditized inventory means buyers can easily become overwhelmed. Etsy is tackling that problem by using artificial intelligence (AI) to personalize search results and curate its catalog based on merchandise quality. In doing so, the company aims to boost engagement by surfacing products that buyers perceive as both relevant and well-made, thus increasing their confidence in Etsy and reinforcing the network effect inherent to the business.
Admittedly, Etsy reported somewhat disappointing financial results in the second quarter, the worst of which was a slight decline in gross merchandise sales. But CEO Josh Silverman says the AI-centric product roadmap could "unlock an enormous amount of growth in the years ahead." He also sees room for further improvement with generative AI. For instance, an intelligent chatbot could make search more conversational, allowing shoppers to ask specific questions, such as, "Can you recommend a button-up shirt that would be appropriate for an upscale restaurant?"
Currently, Etsy values its total addressable market (TAM) at $466 billion, but management says that figure could reach $2 trillion as e-commerce takes share from traditional retail. Etsy has captured less than 3% of its TAM, leaving plenty of upside for investors. And with shares trading at 3.6 times sales, a bargain compared to the three-year average of 9.9 times sales, this growth stock is worth buying.
