I always make sure that my investment portfolio has several growth stocks. While the bulk of my holdings are made up of dividend paying companies that generate a constant stream of passive income, the growth component contributes to higher returns over time. There are dominant companies that are taking advantage of the tailwind and important trends that can enable long-term growth.
Thanks to the pandemic, cloud computing, online payments and social media have emerged as big winners over the past two years as the world flocks on the digital train. Pay Pal (NASDAQ: PYPL), a fintech company with a payment platform connecting suppliers and customers, has been a major beneficiary of the growing number of people transacting and interacting online.
But shares of the payment portal provider fell just under 20% in 2021, with investors wary of soaring valuations of growth stocks. The company is currently worth around $ 222 billion, but I think there are a number of reasons why PayPal could potentially turn into a trillion dollar stock.
Growth accelerated by the pandemic
PayPal’s Total Payment Volume (TPV), a measure of all funds flowing through its platform, has seen a streak of double-digit growth. For the third quarter, TPV grew 26% year-on-year to $ 310 billion, and management expects this metric to increase from 33% to 34% for the full year, with a net increase in new accounts of about 55 million.
PayPal closed the last quarter with 416 million active accounts. Like TPV, the company’s user base has also grown at a rapid pace quarter over quarter. Not only are more people joining the company’s platform, they are also using it more often with 44.2 transactions per active account, up 10% year-over-year.
PayPal had solid finances even before the pandemic began. From 2016 to 2020, its revenue nearly doubled, from $ 10.8 billion to $ 21.4 billion. Operating leverage enabled the company to triple its net income over the same period.
Its momentum continued into 2021, with revenue climbing 20.3% to $ 18.5 billion in the first nine months of the year. Net income jumped 27.8% year-over-year to $ 3.4 billion.
PayPal also has consistently positive free cash flow, generating an average of $ 4.4 billion per year from 2018 to 2020. Year-to-date free cash flow stands at $ 3.9 billion. .
Sound business initiatives
While the pandemic has undoubtedly boosted PayPal’s business, the company has also taken some smart moves to further increase its share of the digital payments pie. For example, it completed its cryptocurrency offering by acquiring Curv, an Israeli company, in March 2021.
Curv is a cloud-based infrastructure provider for digital assets, and PayPal is leveraging this deal to expand its cryptocurrency capabilities. Less than six months after the acquisition of Curv, the company announced a new service in the UK that allows customers to buy, hold and sell cryptocurrency through their accounts, expanding the service that does was previously offered only to US customers.
PayPal also jumped on the buy now, pay later (BNPL) band with the introduction of its own version of the service late last year. To make it even more attractive, the company has removed late fees on its BNPL products globally.
BNPL’s activity looks promising with more than 9.5 million customers registered during the fiscal year ended September 30. About 950,000 merchants have subscribed to the service during the same period. And PayPal recently acquired the Japanese company Paydy for around $ 2.7 billion. Paydy is a major BNPL player in Japan with over six million registered users and 700,000 merchants. This agreement expands PayPal’s reach into the world’s third largest e-commerce marketplace.
Then there is also PayPal’s merger with the e-commerce giant. Amazon to enable US customers to pay with their Venmo digital wallets this year. This collaboration will help the company attract more accounts, adding to the company’s list of partnerships that include Walmart and Booking.com.
Even at its peak scale, PayPal has demonstrated the ability to continue to generate strong revenue and earnings growth, taking advantage of the favorable winds caused by the pandemic. Investors should view the recent drop in PayPal shares as an opportunity to start or grow their long-term holdings in a company with a strong track record.
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