The Reasons to Own This Stock Keep On Growing

Coming into 2020, PayPal (NASDAQ:PYPL) looked like a long-term winner. After the first nine-plus months of the year, PayPal stock looks even more attractive.

After all, this is a company that already was a leader in digital payments. Heading into this year, its industry was certain to grow over time. As the U.S., and indeed the world, moved toward a cashless economy, PayPal and PayPal stock were obvious beneficiaries.

The novel coronavirus pandemic will only accelerate the trends that already existed.

Contactless payments moved from a “nice to have” to a “must-have.” PayPal’s digital wallet, Venmo, has seen its user base explode.

Those trends help the bull case for PayPal stock … but on their own, they’re not enough. PayPal needs to take advantage of its opportunity, and maintain its industry leadership.

The good news is that PayPal is doing exactly that. And so even with the stock up 82% year-to-date, the rally is far from over. At this point, PayPal stock should be a core holding for almost every investor.

Is PayPal Stock Too Expensive?

It’s worth noting that PayPal stock isn’t cheap. It trades at 43x next year’s consensus earnings-per-share estimate. That’s a big multiple.

But I’d keep a couple things in mind when considering that valuation. First, an investor can’t argue that a stock is “cheap” or “expensive” based on a single metric. It’s easy to believe that a stock that trades for 20x forward earnings is cheaper, and maybe even better, than a stock valued at 43x next year’s profits. That’s not necessarily the case.

Indeed, in the market over the last few years, cheaper hasn’t been better. It’s been, usually, a way to underperform the market. Investors are paying up for growth — and I believe wisely. PayPal stock obviously qualifies.

That growth potential in terms justifies the current valuation, particularly for long-term investors. PayPal stock looks expensive now. It won’t in a few years — and the market is pricing that growth in accordingly.

There’s one more factor to keep in mind. PayPal’s expected earnings in 2021 aren’t as high as they could be. The company is aggressively investing behind its business. Wall Street, on average, expects the company to generate $4.55 in earnings per share next year. But PayPal’s earnings power is much higher. Some of its current potential is being obscured by investments being made for future growth.

Keeping the Pedal Down

Those investments make sense. The company has an enormous opportunity to grow its business in the coming years. E-commerce growth is accelerating. Even small businesses are offering services like curbside pickup and online or in-app payment.

Simply put, digital payment adoption is exploding.

And PayPal is looking to take advantage. The company has targeted some $300 million in spending on new products just in the second half of the year. (Again, those investments obscure earnings power: after-tax, that spend alone reduces EPS by about 20 cents.)

The company’s chief executive officer has said the number of product releases this year will equal the total of the last six years. PayPal is keeping the pedal down, and making sure it’s on the cutting edge of the industry.

One of the efforts is particularly intriguing: a Venmo-branded credit card. While users will get a hard copy (printed with a QR code), the card will be managed through the Venmo app and provide particular ease of use for online shopping.

Long-Term Growth

These are the kinds of innovations that keep a company at the head of its industry. And the Venmo credit card is just a single example of what PayPal will roll out in the second half of this year.

Again, those efforts are going to cement the company’s leadership in a highly competitive field. If anything, they may get PayPal even further ahead of the pack.

So what PayPal stock offers is ownership of the current, and future, leader in an industry set for big-time growth. Digital payments certainly are one of the megatrends set to change the way we shop and bank over the next few years.

43x earnings for that kind of story doesn’t sound expensive. In fact, it sounds kind of cheap.

— Matt McCall

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Source: Investor Place