3 Reasons to Buy PayPal Stock

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PayPal (NASDAQ:PYPL) shareholders had a rough ride in the second half of 2021. After reaching an all-time high of $310 in late July, PayPal stock has marched steadily downward and is now sitting nearly 40% below that high mark. The market is giving investors a huge buying opportunity by resetting the price to Oct. 2020 levels.

PayPal lets users send and receive money, make purchases, trade cryptocurrencies, and more. It also operates Venmo, a peer-to-peer payment processor. As the leading name in fintech, it has a solution for nearly every financial circumstance.

While the market has had a few good reasons to sell — such as the rumored Pinterest acquisition — long-term investors have more reasons to buy. I believe the stock can return to its all-time high and set new records beyond that, beating the market along the way.

Image Source: Getty Images.

1. Falling valuation and rising margins

PayPal’s valuation spiked early on in the pandemic as earnings tumbled in the initial aftermath of lockdowns. At the same time, the market recognized the potential for the company as consumers flocked online, fueling a surge in demand for digital payments, online shopping, and the company’s other services. Following the recent sell-off, the stock’s price-to-earnings multiple has returned to pre-pandemic levels.

Data by YCharts.

Lofty valuations were common throughout the tech sector in 2021, but historically, a 45-times multiple is not too expensive for PayPal.

The company intends to continue expanding its profitability too. During an investor day in Feb. 2021, management offered ambitious projections through 2025 with PayPal growing earnings at an average rate of 22% per year, driven by 20% top-line growth and rising operating margin. Should PayPal deliver on this outlook, earnings growth should push the stock price higher and deliver market-beating returns along the way.

2. Growing total payment volume and transactions

At its core, PayPal is a payments business, taking a slice of the billions of transactions that flow through its platform each year. As total payment volume (TPV) increases, PayPal generates more revenue.

In the third quarter, TPV grew 26% year over year to $310 billion, driving 13% revenue growth. These results are impressive considering they stack on top of a strong prior-year quarter when TPV was up 38%, and revenue jumped 25%.

Active accounts also increased 15% to 416 million, and users are engaging with the platform more often.

Payment Transactions per Active Account Over the Trailing-12-Month Period
Q3 2021 Q2 2021 Q1 2021 Q4 2020 Q3 2020
44.2 43.5 42.2 40.9 40.1

Source: PayPal.

3. New opportunities

PayPal is becoming a one-stop shop for its users’ daily finances. The superapp has expanded its functionality to include cryptocurrency trading, savings accounts, direct deposits, and more. Digital wallets are becoming increasingly common around the world, and PayPal is aiming to be the leader of this space.

In pursuit of that goal, the company recently announced a partnership with Amazon. The e-commerce giant doesn’t allow use of PayPal at checkout, but starting this year, it will accept Venmo, which boasts more than 80 million users.

Another important expansion for the company comes from buy now, pay later (BNPL). According to a CNBC survey, 7% of shoppers said they would use BNPL for holiday purchases. PayPal’s version has been in high demand — CEO Dan Schulman said BNPL usage was up 400% on Black Friday, utilized around 750,000 times. Additionally, one million users tried the BNPL service for the first time last November, a record for the company.

PayPal’s biggest critics are short-sighted. It’s hard to ignore the opportunity in PayPal’s expanding ecosystem, just as its valuation has returned to pre-pandemic levels. It’s not often the market leaves great businesses sitting around at a discount, and the company is set to quickly bounce back in 2022.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.