PayPal’s (NASDAQ:PYPL) huge first-mover advantages, its high profits, its large cash pile, and its demonstrated ability to move quickly to exploit opportunities put it way above the other well-known fintech names. Additionally, the valuation of PYPL stock is quite reasonable, especially in comparison with that of the other top fintech companies.
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All in all, I believe that the company’s shares are very well-positioned to outperform the Nasdaq over the next six months to two years, while its risk-reward ratio is very attractive.
First-Mover Advantages
When it comes to the world of fintech for consumers, PayPal has a big lead over its competitors. Addressing a JPMorgan (NYSE:JPM) conference on Sept. 23, PayPal CEO Dan Schulman reported that 400 million+ consumers were using its platform, and that “5 billion transactions plus a quarter” are being carried out on PayPal.
On its own, the company’s new “buy now, pay later feature” generated total payment volume of $1.5 billion in the second quarter, Schulman estimated, with ” 7 million-plus consumers using it over 20 million times {in Q2}.”
On the merchant side, PayPal has 32 million customers. PayPal’s total payments volume in 2021 will be ” somewhere around 1.25 trillion plus,” representing a surge of 500%-600% versus 2015, the CEO stated.
Those metrics appear to be heads-and-shoulders over PayPal’s competitors. For example, Zelle, the banking app in which thousands of banks, including JPMorgan, Citi (NYSE:C) and Wells Fargo (NYSE:WFC) participate, had 1.2 billion of transactions worth $307 billion in all of 2020.
So PayPal is enabling more than four times the number of transactions each quarter than Zelle facilitated in all of last year. And PayPal’s total payments volume is expected to be roughly 400% higher this year than Zelle’s was in 2020.
As of the end of Q2, SoFi had “nearly 79 million” accounts, versus PayPal’s 400 million+ users. In Q2, the total origination volume of SoFi’s Lending unit was slightly under $3 billion, representing an annualized rate of $12 billion. Conversely, Schulman, as I mentioned earlier, estimated that PayPal’s total payment volume this year will be about $1.25 trillion.
Even Square’s (NYSE:SQ) quarterly gross payment volume is slightly over $40 billion, putting it at an annual rate of slightly under $170 billion.
High Profits, Ample Cash, and Very Agile
PayPal’s operating income came in at $1.13 billion, up from $998 million during the same period a year earlier. Its EBITDA climbed to an impressive $1.44 billion, up from $1.295 billion versus the year-earlier period. So its profitability is high and climbing.
Conversely, Square’s operating income was $170.3 million in Q2, and its EBITDA was $198.,7 million. Meanwhile, SoFi (NASDAQ:SOFI) loses a significant amount of money each quarter.
PayPal had $12.39 billion of cash at the end of Q2, versus $5.6 billion for Square and $462 million for SoFi.
PayPal’s large cash hoard, combined with Schulman’s obvious belief in making big, quick moves, have enabled the fintech company to quickly take advantage of emerging trends. F
or example, the company has already launched, without making an acquisition, a “Buy Now,Pay Later” offering to take advantage of that trend. Incidentally, InvestorPlace Senior Investment Analyst Luke Lango calls Buy Now,Pay Later “the hottest hypergrowth industry in the world right now.” I wouldn’t go that far, but it certainly is a hot trend. Given PayPal’s huge user base and its relatively early entrance into the sector, the company is very well-positioned to exploit the trend.
What’s more, the company recently acquired Japanese fintech player Paidy, which has 6 million users and more than 700,000 merchants in the Asian country. Paidy, which is also already offering Buy Now, Pay Later, is very well-positioned in Japan because it “has connections into all of the convenience stores where people… pay cash and then they can complete the online transaction,” Schulman explained. He believes that Paidy is poised to grow a great deal in its home market.
Valuation and the Bottom Line on PYPL Stock
Trading with a forward price-earnings ratio of 41, the shares aren’t extremely expensive, considering that the company is a rapidly growing, innovative tech company.
Given PayPal’s many positive attributes, its huge potential, and its reasonable valuation, all types of investors should look to buy PYPL stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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