Expand / Collapse search
Watch TV
Menu

Quotes displayed in real-time or delayed by at least 15 minutes. Market data provided by Factset. Powered and implemented by FactSet Digital Solutions.  Legal Statement.

This material may not be published, broadcast, rewritten, or redistributed. ©2024 FOX News Network, LLC. All rights reserved. FAQ - New Privacy Policy

Markets
Published | Updated

Is PayPal Holdings, Inc. a Buy?

PayPal (NASDAQ: PYPL) is a leader in the digital payments space. The company handled nearly $400 billion in payment volume over the last year. It ended the first quarter with 218 million consumers and 19 million merchants using its platform, and each user made an average of 34.7 transactions through PayPal over the last 12 months.

But PayPal faces growing competition from other payments and merchant services businesses like Square (NYSE: SQ), hardware makers integrating payments into their devices like Apple (NASDAQ: AAPL) and Samsung (NASDAQOTH: SSNLF), and banks establishing their own peer-to-peer payments service. On top of all that, PayPal is in the process of losing its largest customer, eBay (NASDAQ: EBAY).

With all the pressure on PayPal, investors may be wondering if its excellent growth can continue. And even if it can, investors might not be sure if the stock is a buy at its current price. Let's take a closer look at PayPal's business and then look at the stock itself.

PayPal's competitive advantage

PayPal has built an extensive network of consumers and merchants that provides a very strong network competitive advantage. The company's 200-million-plus global PayPal users can make it easier for online merchants to complete sales, driving further merchant adoption. That generates a virtuous cycle, as more customers join as they see PayPal accepted by more merchants.

That network effect is particularly strong on mobile devices, where merchants historically have a hard time completing online sales. Typing in payment information is particularly tedious on mobile, and PayPal offers a solution. Total payment volume on mobile increased 52% year over year in the first quarter for PayPal, and 8.6 million merchants now offer OneTouch, PayPal's simple mobile checkout product. As more shopping shifts to mobile, PayPal stands to be a major beneficiary.

PayPal also has strengths in mobile payment processing through Braintree. Braintree provides a payments layer for mobile app developers that makes the experience practically seamless for consumers. (When's the last time you thought about how you pay for an Uber ride?)

Braintree also spawned Venmo, a mobile-first peer-to-peer payments app. PayPal is in the early days of monetizing Venmo, but its popularity with millennials and the average frequency of use could lend itself to better margins than PayPal's flagship platform in the long run. Venmo processed over $40 billion of payment volume over the last 12 months.

How big of a risk is losing eBay?

PayPal and eBay announced they aren't renewing their operating agreement that had PayPal processing payments for eBay's marketplace business. PayPal, however, will remain as a branded payment option for eBay customers; it's only losing the back-end processing business.

PayPal says it's historically kept the majority of business with other merchants that have switched processing partners in the past by virtue of its branded "Pay with PayPal" button. There's a good chance that number could be higher with eBay considering its long-standing partnership with its former parent company.

Even so, eBay is accounting for an ever-smaller percentage of payment volume on PayPal's platform. Last quarter, eBay's business accounted for 12.7% of PayPal's payment volume. And while PayPal's other merchants are growing volume around 30% per year, eBay is growing around 6%. As such, eBay will continue to account for a smaller source of revenue for PayPal.

To be sure, the departure will hurt PayPal's business, but it also opens up new opportunities to PayPal that were restricted under its former operating agreement. The majority of the impact won't occur until 2020, so PayPal has some time to get things in order.

Competitive threats

PayPal faces significant competitive threats from other payment processors as well as companies able to embed a payments platform into their hardware.

Square has been aggressively pursuing the consumer market with its Cash App. It added substantial functionality to its peer-to-peer payments app last year, including a linked debit card and the option to buy bitcoin, and it ended the year with 7 million monthly active users. While Square is primarily focused on merchant services and peer-to-peer payments for now, it could eventually find itself offering more consumer payment services like PayPal. Considering its network of merchants, it could be a very competent competitor.

Meanwhile, hardware makers are pushing more and more customers to use embedded payments platforms like Apple Pay or Samsung Pay. Samsung offers a rewards program for frequent Samsung Pay users, and Apple has recently been pushing promotions for using Apple Pay. Even Amazon is considering getting into the peer-to-peer payments market through its Alexa-enabled devices (as well as providing banking services for the underbanked). Considering the ability of these companies to make authorizing payments as easy as looking at your phone, they represent a meaningful threat to PayPal's growing business, particularly on mobile.

There's no shortage of competitive threats for PayPal, but its current network of both consumers and merchants should enable it to continue producing strong returns for investors. That said, investors will need to keep an eye on how the competition is progressing and any impact it may be having on PayPal or Venmo usage.

Is the stock a buy?

PayPal has a good moat -- although the enemy is hard at work to narrow it -- and the impact from losing its biggest customer should be relatively muted. It's one of the biggest beneficiaries of the trend toward online and mobile sales, which is fueling its growth. That trend isn't slowing down anytime soon.

So, if it presents a good value, it should be worth buying.

PayPal's current enterprise value-to-sales ratio is 6.1. That compares favorably to Square's 8.2 ratio.

PayPal also trades for a forward P/E ratio 32.5, which is a bit high considering analysts currently expect earnings per share to grow just 18.7% per year over the next five years, producing a PEG ratio of 1.7.

But considering PayPal's strong cash position; the growth of online and mobile commerce that acts as a tailwind to revenue growth; and the expanding margins it can realize as it begins to monetize Venmo, sheds its low-margin eBay business, and continues to scale; I think PayPal can grow earnings faster than what the average analyst currently expects. I think it presents fair value at its current price, and anyone that wants to get into the fintech space should consider it for their portfolio.

10 stocks we like better than PayPal HoldingsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and PayPal Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 2, 2018

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy owns shares of AMZN, AAPL, and eBay. The Motley Fool owns shares of and recommends AMZN, AAPL, and PayPal Holdings. The Motley Fool owns shares of Square and has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.