It’s no news to anyone that these are trying times for many companies. As the COVID-19 pandemic continues, industries such as tourism and travel have been particularly hard hit by border closures, restrictions, and a general desire by people to avoid unnecessary risks of exposure. However, great opportunities can also arise from crises.
For example, social distancing has contributed a strong tailwind to the transition of business and consumer activity into the online universe, which has, in turn, driven a boom for technology stocks.
Among those accelerating trends are the shifts toward digital payments and e-commerce, and Paypal (NASDAQ:PYPL) is a key beneficiary of those changes. The company has acted as an intermediary between consumers and corporations since 2000, and its platform boasted 346 million active accounts at the end of the second quarter.
Here are some reasons why buying Paypal could be the smartest investment decision you’ll ever make.
Image source: Getty Images.
Impressive financial performance
Source: Paypal’s 10-K Filings; Author’s Compilation. 2020 annualized figures based on first-half results.
Paypal has consistently grown both its revenue and net income over the years. It nearly doubled its revenue between 2015 and 2019, while net income more than doubled from $1.2 billion to $2.5 billion. In the second quarter of 2020, net revenue jumped by 22% year over year to $5.3 billion, while net income soared by 86% to $1.5 billion.
The annualized revenue and net income data shown in the graph are based on Paypal’s first-half 2020 earnings report, but investors should note that the company’s business performance improved significantly in its latest quarter due to the pandemic-induced acceleration in digital commerce and payments. Second-quarter net income made up around 95% of the net income for the first half, suggesting that there is a high chance Paypal’s full-year revenue and net-income results will surprise to the upside.
A highly scalable platform
The operational metrics relating to Paypal’s platform have been equally impressive. From Q2 2015 through its latest quarter, it achieved more than sixfold growth in net new active accounts, from 3.4 million to 21.3 million. Over the same period, total payment volumes more than tripled from $69 billion to $222 billion.
And with many countries encouraging people to switch to online payments to avoid handling physical cash, Paypal is in a great position to add many more new users in the coming years.
A massive total addressable market
Paypal has acknowledged that its total addressable market (TAM) could be enormous. Back in 2018, the company had identified a TAM of around $110 trillion in payment volume, consisting of mobile commerce, peer-to-peer transfers, and digital services. Market researchers have estimated that the global-payment processing-solutions market alone could grow to $78.2 billion by 2026. Paypal’s revenue is just a fraction of this currently, and with its market growing faster than before, many players within the industry can enjoy concurrent rapid growth.
CFO John Rainey remarked at the most recent conference call that Paypal will invest $300 million to roll out a host of new products in the latter part of 2020 to capitalize on the opportunities brought about by the pandemic. These new products may take time to gain traction, but they offer the tantalizing prospect of adding strong growth to both the company’s user base and its top line.
Still a long runway for growth
PayPal still has a long runway for growth as it continues to strengthen its platform and expand its presence in multiple markets. It has also tied up with Mastercard (NYSE:MA) to expand its debit-card offering to five new European countries, and the cash-back program represents an attractive feature for merchants.
CEO Dan Shulman summarized the company’s prospects by stating that “digital payments have become more important and essential than ever” because of the pandemic. I concur with his view and believe that the company is headed for another multiyear period of strong growth as it rides these tailwinds.
