PayPal (PYPL 2.90%) was on top of the world a few years ago. Surging growth that was boosted by the pandemic sent the stock to record levels. Since then, though, macro headwinds, normalizing consumer behavior, and competitive forces have brought things back to reality.
As of this writing, shares of PayPal are trading about 80% below their all-time high. The market appears to still be pessimistic about the business and its prospects.
But are much better days on the horizon for PayPal? Could this top fintech stock even become a $1 trillion company by 2035?
Betting on huge gains
As of March 4, PayPal's market cap sat at $64 billion. To reach a $1 trillion valuation would require a whopping 15-fold expansion -- truly exceptional growth. Even 11 years from now, that market cap would likely make PayPal one of the world's 50 most valuable companies. It's currently 274 on the list.
So what exactly might it take to turn this lofty hypothetical into a reality?
There's no question that PayPal would need to find ways of accelerating its growth. For reference, and to its credit, its total payment volume (TPV) in 2023 of more than $1.6 trillion was up 165% from five years earlier. But it would have to pick up that pace, whether that even faster growth came via its PayPal branded checkout solution, Braintree unbranded processing, Venmo, or a combination of the three.
I also believe the business would need to attract more users. While PayPal counted 426 million active accounts as of the end of 2023, this figure was down 2% from the end of 2022. Boosting this figure could be difficult, as management is prioritizing increasing its engagement with existing customers over trying to bring in new ones. And competition is intense both on the merchant and consumer side. However, transactions per active account (for the trailing-12-month period) were up 14% in Q4, a positive sign.
It will also be necessary for PayPal to expand its margins, and Alex Chriss, the new chief executive officer, is focused on driving greater efficiencies across the organization.
This company generates a ton of free cash flow (FCF), to the tune of $4.2 billion in 2023. Management has aggressively repurchased stock, shrinking the share count by 4.4% just in the past 12 months. If this pattern continues, it would be reasonable to expect the stock price to rise significantly faster than the market cap, which would only help to boost investor returns.
Still a solid investment opportunity
I don't doubt that PayPal's loudest bulls are hoping that the business can reach the exclusive 13-figure club. However, I believe it's probably best to seriously temper such expectations. Expecting a company's market cap to rise 15-fold in less than 12 years is wishful thinking -- many, many things would need to go right in a big way for that outcome to become a reality.
In the payments world, I would bet on Visa and Mastercard cracking $1 trillion before PayPal. They're both basically halfway there, and they still have solid growth prospects.
But this doesn't mean that PayPal is a poor investment opportunity. There are reasons to be optimistic about this solid business.
Revenue and TPV are trending in the right direction, indicating greater usage and monetization of the platform. The company's two-sided ecosystem benefits from network effects, protecting PayPal's competitive position. And we can't forget how profitable an enterprise this is, with consistent FCF generation.
At the current forward price-to-earnings ratio of 11.8, the stock looks like a smart buy right now, but only if you plan on holding it for at least the next three to five years.
