Payment processing giant PayPal Holdings (NASDAQ:PYPL) has had a great run so far this year. Its shares have rallied more than 16% in the first two months of 2019, fueled by surging business volumes and the number of users.
The latest evidence of the strength of its platform came last month when the San Jose, Calif.-based company reported a 13% jump in fourth-quarter sales and predicted another 16% to 17% expansion for 2019.
With its shares emerging stronger after every correction during the past 52 weeks and propelling to new record highs, it makes sense for new investors to get excited about this fantastic growth play.
Riding The Power Of The Checkout Button
PayPal has pursued a smart growth strategy, combined with some valuable acquisitions and strategic moves over the past five years. To counter the growing competition in this very crowded space of digital payments, where disruptors are attacking from all fronts, PayPal decided to open up and made valuable alliances with the largest credit-card issuers, Visa (NYSE:V) and Mastercard (NYSE:MA).
This strategic move in 2016 allowed consumers to seamlessly link their accounts with their credit and debit cards, while giving PayPal access to contactless payment technology.
During this period, PayPal also bought many companies that kept it at pace with the fast-changing technology. After its highly successful 2014 acquisition of Venmo, which became very popular with tech-savvy young consumers, PayPal bought Swedish small-business platform iZettle last year for $2.2 billion as part of its push to expand globally and increase its presence in brick-and-mortar stores. Hyperwallet, which helps companies to send payments almost anywhere in the world, was another important transaction of the last year.
The biggest success that unlocked the future growth for PayPal came from its online checkout button that appears on vendors’ websites. For buyers, it’s a great convenience factor, removing the hassle of punching in card details and other information for every transaction.
According to an estimate by MoffettNathanson, that feature has become so popular that it alone produces about 85% of PayPal’s revenue and attracts 50x the volume of its closest competitor, Amazon Pay. Merchants love to have this feature on their websites as the ease of transactions mean more sales for them.
Can The Growth Continue?
After gaining more than 20% during the past 12 months and more than 180% over the past five years, PayPal stock is trading very close to analysts’ 12-month consensus price target of $99.88. But that doesn’t mean that this stock isn’t offering further value to long-term investors.
The online payment industry has a strong upside at a time when e-commerce is gaining share everywhere. That’s the reason analysts continue to forecast strong revenue growth for PayPal, more than 16% in this fiscal year and about 18% in 2020.
Some investors might not like the company’s reliance on checkout-button volumes. But that risk is going to fade away as the company’s recent acquisitions start to diversify its revenue base. In the fourth quarter PayPal added 13.8 million net new active accounts. About 20%, or 2.9 million, of them came from the acquisitions of Hyperwallet and iZettle.
PayPal stock may not rise at the pace seen during the past five years, but the company is still very much in a growth phase. If you are looking to get some exposure to an important growth industry, PayPal can still provide value for those with a long-term investing horizon.