PayPal (PYPL 2.77%) was once a top stock to own among the investment community. In the five years leading up to their all-time high, the shares soared 724%. The business benefited tremendously from digital payments adoption during the pandemic.
However, growth has slowed in the years since. And the market has lost some of its enthusiasm toward the fintech stock, which trades 79% off its peak (as of Oct. 16). Despite the decline, there are reasons to be bullish on PayPal.
But can this stock make you a millionaire?
PayPal has numerous attractive qualities
Investors first need to figure out whether PayPal is a solid business that's worth being on the radar. I believe that it is, for a number of reasons.
For starters, the company benefits from a durable tailwind, which is the adoption of electronic payment methods at the expense of cash- and paper-based transactions. Specifically, PayPal has gained from the rise of online shopping. Looking ahead, this secular trend should continue to lift the business.
During the second quarter, PayPal processed $443 billion of total payment value. And the company reported $8.3 billion of revenue. Looking five or 10 years down the road, there's a good chance that these two key figures are much higher.
At a high level, PayPal operates a two-sided payment platform. It has 438 million active accounts, a number that consists of both merchants and individuals. These users benefit as the platform gets larger, creating a network effect. This bolsters PayPal's competitive position, as it would be very difficult for a start-up to build a similar platform from scratch. It also works to PayPal's benefit that it has led the way in online shopping for more than two decades.
Another positive attribute is just how consistently profitable the company is. In the past 10 years, the company's operating margin has averaged 16%. And under the leadership of Chief Executive Officer Alex Chriss, PayPal has focused more on operational efficiencies, which has helped the bottom line. Operating income jumped 14% in Q2.
Management thinks that the business will generate $6 billion to $7 billion of free cash flow in 2025. It plans to use $6 billion on share repurchases. That helps boost earnings per share.
This fintech stock looks like a smart buy, but getting to millionaire status is a different question
Payment processing companies can be incredibly lucrative. As a result, it shouldn't be surprising that the industry is very competitive. There are rivals that do a good job targeting individual consumers. On the other hand, there are many businesses that specifically serve merchants, too.
PayPal has to deal with these threats. This is something to keep in mind. And it could add pressure to the company's profitability, especially as industry participants cut fees to gain market share. What's more, this could make it difficult to expand the user base.
However, I think PayPal deserves the benefit of the doubt. It has a strong brand name that's trusted and known for speed, security, and innovation. This matters when moving money around, as individuals and businesses prioritize reliability and ease of use.
It helps from an investing perspective that the stock is attractively priced. Investors can buy shares at a forward price-to-earnings ratio of 11.9. This adds potential upside for the next few years.
PayPal looks like a smart buying opportunity right now for long-term investors. But I don't think the stock is a millionaire maker. The company is no longer going to register the same kind of monster growth that it did during the depths of the pandemic. And from a portfolio perspective, investors shouldn't bank on a single business generating that much wealth. It's best to have diversified holdings.
