Nearly 25 years ago, Elon Musk and Peter Thiel disrupted the world with digital payments company PayPal (PYPL 0.13%). Today, it remains the strongest competitor in a fast-moving industry, and it is by far the cheapest, highest-quality tech stock you can buy in 2024.
The core of PayPal's business comes from the merchants who accept it as a form of payment and the customers who rely on it to pay their bills.
For merchants, the main value of accepting PayPal is it gives a customer the flexibility to pay with their credit/debit card, Venmo, or even competing digital wallets. This reduces friction and makes it easier (and therefore more likely) for a transaction to occur.
For customers, the biggest benefit is privacy and security. PayPal customers can buy something without sharing their financial information with the merchant.
PayPal's simplicity and security has created widespread brand awareness among people of all ages.
NASDAQ: PYPL
Key Data Points
Steady annual revenue growth
Today, PayPal has 391 million consumer accounts and 35 million merchant accounts, but its most important metric is total payment volume (TPV), which rose 13% in 2023 to $1.53 trillion. It is the single biggest driver of the company's revenue.
Overall, PayPal's net revenue increased 8% in 2022 and 2023, and there's good reason to think it will grow by a consistent 8%-plus annually for years to come.
Although this company is no longer the rapidly expanding Silicon Valley start-up it once was, it's still providing solid revenue and payment volume growth 25 years later, and there are three main reasons this should continue.
First-mover advantage
First, PayPal's massive size gives it a moat in the competitive digital payments industry. It was the first mover and operates in 200 countries and territories around the world. For a competitor to take away market share, it has to have a much better value proposition for someone to stop using their PayPal account.
The more customers who use PayPal, the more merchants will accept it as payment. This will keep total payment volume growing for years to come.
Widespread reach
Second, PayPal isn't just a high-value, well-known global brand. The company also owns brands including Venmo, Braintree, HyperWallet, and Xoom.
Venmo is one of the most popular digital payment apps. Over 78 million people use it, mostly in the United States, and Venmo's revenue doubled from 2020 to 2022. Braintree helps merchants accept both PayPal and credit cards with a single integration. HyperWallet makes global payments quick and simple, and Xoom lets people transfer money.
Whenever someone makes a purchase using any of PayPal's brands, the company receives a portion of the amount. It's a lucrative business to be in, especially when TPV is rising consistently like PayPal's is.
A government-backed moat
Finally, PayPal's moat extends beyond its size and well-known brands. Because the industry is so regulated, that makes it extremely difficult for new competitors to enter. PayPal's government licenses allow it to operate, and a competitor can't simply join the industry without government approval.
The company owns licenses in the U.S. to operate as a money transmitter, and in the state of New York it holds a full BitLicense issued by the New York Department of Financial Services to offer cryptocurrency services. These licenses extend to its other brands.
PayPal has a consistently growing business, as well as a clear path to staying ahead of the competition, but we haven't reached my biggest reason to be bullish...
The cheapest, highest-quality tech stock today
PayPal is a tech stock in the digital payments space, but its valuation is closer to a bargain value stock.
As I'm writing, its price-to-sales ratio (P/S) is just 2.16, which means investors are paying $2.16 for every dollar of the company's sales.
In June 2021, the P/S was nearly 15! This stock is cheap compared to its historical average, and cheap compared to its competitors, too.
Global Payments is a digital payments company and member of the S&P 500 and Fortune 500. Its P/S is 3.52 today, roughly 63% more expensive than PayPal.
Block, which owns CashApp and Square, has a P/S of 2.29 -- just a little more than PayPal.
Buy and hold
PayPal's ubiquity has made it one of the world's most well-known brands among nearly every demographic, and its size and scale are fueling its next evolution of growth.
The new era of cryptocurrencies has made digital payment software even more important, and PayPal is in a perfect position to capitalize.
The stock's 2.16 P/S makes it the cheapest, highest-quality tech company in the market today. PayPal probably won't trade at a discount for long, because its Venmo subsidiary and its government licenses ensure years of steady growth.
This is the type of stock you can buy and hold for years.
