PayPal (PYPL +0.48%) shareholders are really hoping that things turn around. The stock price of the leading digital payments enterprise is currently 81% below its all-time high, despite financial performance that's still healthy amid favorable industry tailwinds.
Perhaps some investors are still holding on to shares with the hopes that PayPal hits a major milestone that many tech giants have reached. Can this popular fintech stock be included in the coveted $1 trillion valuation club by the year 2040? It's a certainty that if this happens, investors would be greatly rewarded, especially since the company's current market cap sits at just $64 billion.
Let's find out if PayPal shares (assuming the share count stays the same) can rise at an annualized pace of roughly 18% over the next 17 years to reach that goal.
Reasons to be optimistic
You wouldn't be able to tell by the stock's performance, but there are some positive factors that can work in PayPal's favor. Most notable is the secular trend away from cash and toward electronic payments, something this business itself has helped drive forward. Using noncash forms of payment adds greater convenience and security, and this shift coincides with the ongoing evolution of the internet.
In the U.S., 58% of Americans still use cash for some or all of their transactions in a typical week, resulting in a still-sizable growth runway. Consequently, PayPal is staring at a large total addressable market. By 2030, it is estimated that the global market for digital payments will be a $361 billion opportunity. This provides PayPal with a powerful tailwind to gain from.
In light of this favorable industry backdrop, it's easy to be optimistic about this business in particular. PayPal is the most popular digital wallet option, accepted at nearly 80% of the top 1,500 merchants in North America and Europe. This positions it well to capitalize as more consumers transact in e-commerce settings. In fact, in the most recent quarter (Q2 2023, ended June 30), transactions per active account increased 12% on a year-over-year basis, indicating higher engagement.
On the merchant side, PayPal's Braintree segment grew total payment volume by 40% in 2022, faster than the business overall, which likely means there is lots of potential as we look out over the next decade.
Despite outsized growth prospects, PayPal is in a strong financial position. The company generated $5.1 billion of free cash flow in 2022, with management expecting $5 billion this year. This cash has been used to shrink the outstanding share count, which can benefit existing investors. Additionally, it will allow the leadership team to continue investing in the right growth opportunities.
NASDAQ: PYPL
Key Data Points
Reasons to temper expectations
Competition is the biggest challenge PayPal faces that will get in the way of it reaching a market cap of $1 trillion. The payments industry is incredibly lucrative, and this information isn't a secret. As a result, PayPal must go up against businesses that have their own compelling service offerings.
Consumers can choose to sign up for a Cash App account from Block. Apple Pay is a budding digital wallet solution. And when it comes to specific services, individuals can look to SoFi Technologies for all their banking needs or Robinhood Markets to set up a brokerage account.
The space is getting increasingly crowded, with the ability to differentiate between service providers becoming a bigger struggle. Therefore, I view competition as the single greatest obstacle for PayPal getting to the $1 trillion club.
And if we look at the payments industry, I think there are two other dominant companies that have a much better shot at reaching that goal. Visa and Mastercard, which both have market caps greater than $350 billion, are already much more valuable than PayPal. And they also stand to gain as digital payments proliferate.
While it's anyone's guess as to whether PayPal will be worth $1 trillion by 2040, it might be best to temper these lofty expectations. However, investors might still be compelled to own the stock given its attractive valuation, trading at a price-to-earnings ratio of just 16.4.
