PayPal (NASDAQ: PYPL) is a leader in the electronic payments niche of the broader financial services industry but hasn't been too kind to investors in recent years. Shares currently trade at an alarming 73% off their peak, which was established in July 2021.
However, there's been a renewed sense of optimism from the market, as the fintech stock has climbed 25% in the past three months (as of Nov. 18). Does this momentum make the PayPal shares a no-brainer buy that can double in five years?
Solid financial performance
You wouldn't be able to tell by the stock's terrible trailing-three-year performance, but this business continues to put up healthy financial performance. Growth is still a part of the equation.
In the last quarter, Q3 2024, which ended Sept. 30, PayPal processed a whopping $423 billion in total payment volume (TPV), a figure that was up 9% year over year. All key segments, like the branded checkout solution, Braintree, and Venmo, posted solid TPV gains, indicating broad-based success.
This helped drive 6% revenue growth. Looking ahead, there's meaningful potential for the top line to continue expanding for a long time.
PayPal benefits from two key secular trends that can keep pushing it forward. The first is the rise of electronic payments, which consumers and merchants view as a safer and more convenient method of conducting commerce. The second trend propelling PayPal is the rising popularity of online shopping.
Right now, brick-and-mortar still makes up 84% of all retail spending in the U.S. There's a lot of room for e-commerce to penetrate.
PayPal doesn't struggle in the profitability department. Its operating margin has averaged an impressive 16.3% in the past five years. Strong bottom-line performance leads to lots of free cash flow (FCF), helping to mitigate financial risk.
Key competitive advantages
Since its founding in the late 1990s, PayPal has risen to become a dominant force in the world of digital payments. Its current industry position is supported by some notable competitive strengths that remain relevant for investors to know.
As a two-sided ecosystem that consists of millions of merchants and individuals, PayPal benefits from network effects. Merchants want to plug into the platform because of the huge number of consumers that have accounts. This provides a large potential pool of revenue-generating opportunities.
For individuals who understand how widely accepted PayPal is, it makes sense to sign up to be a customer. That's because there are so many places to shop.
The company's brand arguably has tremendous value, particularly in the payments space. PayPal has built up a reputation as a secure, seamless, and innovative way to move money around. This helps bring in new accounts and partnerships.
Since they can help solidify PayPal's competitive standing, network effects and a powerful brand should keep PayPal relevant for a while.
Compelling valuation
Despite PayPal shares soaring over the past three months, the situation is still very attractive for prospective investors. The stock has gotten so crushed in the last few years that the valuation remains compelling.
If you want to buy shares, you'll have to pay a forward price-to-earnings ratio of 18.5. This is a compelling multiple for a company that, according to Wall Street consensus analyst estimates, will increase FCF at a compound annual rate of 20% between 2023 and 2026.
If this bottom-line forecast becomes true, coupled with the prospects of a valuation multiple expansion, investors would have a shot at doubling their initial capital by buying and holding this business over the next five years.
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*Stock Advisor returns as of November 18, 2024
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
