To be successful at investing over the long-term, it's crucial to stay focused on business performance and forget about the short-term zigs and zags of the market. There's no way to know where these stocks are headed in the short term, but there's plenty of reasons to expect PayPal Holdings (NASDAQ: PYPL), Take-Two Interactive (NASDAQ: TTWO), and Restaurant Brands International (NYSE: QSR) to deliver market-beating gains for shareholders over the long-term.
Here's why I believe each stock is still a great buy.
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PayPal is a compounding machine
The growth of mobile payments is one of the biggest megatrends impacting the global economy, and PayPal is at the epicenter. PayPal processed $419 billion in total payment volume (TPV) over the trailing 12-month period, and this figure has been consistently growing more than 20% year over year. Its mobile app and online platform are used by a steadily growing base of 218 million customers.
PayPal's Venmo app, a peer-to-peer payment service which processed $30 billion in TPV over the last year, continues to grow more than 100% year over year. Venmo has mostly been a free service, but PayPal has the potential to significantly pad its profits over the long-term as the new Pay with Venmo feature for merchants starts to roll out. This feature relies on the merchant paying the transaction cost, around 2.9% of the total transaction amount plus 30 cents per transaction. Given the success of Venmo, particularly among millennials, there are plenty of businesses willing to pay the incremental cost to offer consumers a convenient payment method.
In addition, PayPal's core platform continues to shine. Customer account growth has accelerated in 2017 following partnership agreements with major credit cards and banks to make it easier for customers to use their preferred funding option within their PayPal digital wallet at point-of-sale locations.
Management's strategy to give customers more choice is not only attracting new customers but increasing engagement with the platform. Customers are using their account about once every two weeks, but this frequency is growing around 10% per year. Management's long-term goal is to increase engagement to two times per week, this would bring TPV to over $1 trillion.
PayPal's forward P/E ratio is quite high at 31 times 2018 earnings estimates, but the company's leading position in the fast-growing mobile payments market makes it worth paying up for.
It's game on for Take-Two Interactive
Take-Two's stock is up 780% over the last five years, but the company has only just begun to benefit from the industry's shift to digital distribution. The stock looks expensive trading at 60 times trailing earnings, but its forward P/E ratio is much more attractive at 21, reflecting a big year for new releases coming up in calendar 2018.
The stock's recent gains have mostly stemmed from the amazing run Take-Two's flagship franchise -- Grand Theft Auto V -- has had since its 2013 release. GTA V has sold more than 85 million units and continues to grow from the popularity of its online multiplayer game mode. Because of GTA Online and NBA 2K's virtual currency, recurrent in-game spending is quickly growing as a percentage of Take-Two's revenue. Over the last year, revenue from in-game spending averaged 43% of total revenue, and this percentage should increase as management continues to pursue a microtransaction strategy for monetizing future games.
As Take-Two continues to grow digital revenue and build up more cash on its balance sheet, the company will have the resources to diversify into more franchises to go along with Grand Theft Auto, as well as invest in other potentially lucrative ventures like esports.
Analysts expect Take-Two to report $3.06 in earnings per share for fiscal 2018 ending in March. Next year management anticipates strong sales from the highly anticipated launch of Red Dead Redemption 2. The western action game will feature an online component similar to GTA V, which gives Take-Two another big franchise to grow in-game spending and expand margins. Early estimates from analysts call for earnings per share to grow 55% next year to $4.76 per share, making the stock very worthy of consideration now before the market wakes up to this growth story.
Restaurant Brands wants to dominate fast food
Restaurant Brands is the parent company of Burger King, Tim Horton's, and Popeyes Louisiana Kitchen. Under the influence of 3G Capital's business strategy, the company is focused on acquiring recognizable fast food brands and then allowing those chains to reach their worldwide growth potential through efficient management and good capital allocation.
The company is off to a good start with non-GAAP (adjusted) earnings per share up 45% in 2016, and 19% so far in 2017 as management's cost-cutting has made restaurants leaner and more profitable. The top line is only growing mid-single digits, but that's fine because management's focus is improving restaurant-level efficiency and expanding margins. For this reason, analysts expect the company to grow earnings 19% compounded annually over the next five years.
Management has been forming franchise deals with international partners to spread Burger King's footprint around the world. The recently acquired Popeyes chain is mainly a regional U.S. fast-food brand, so management will be focused on growing the business throughout the U.S. and also internationally. The same strategy is being applied to the popular Canadian chain, Tim Horton's.
RBI is a bet on a group of savvy capital allocators to take leading fast food brands and create the largest, most profitable restaurant empire in the world. 3G Capital is already doing this with Anheuser-Busch InBev (NYSE: BUD) in the beer market, with Kraft Heinz (NASDAQ: KHC) in the food industry, and now with fast food.
The stock is up 87% since it began trading publicly a few years ago and currently trades for about 23 times analyst estimates for 2018 earnings per share. The market is slowly catching on to the growth story here, but RBI has a large market opportunity around the world, so it's not too late to add this tasty stock to your portfolio.
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