Why the PayPal share price is on track to hit $US110
PayPal delivers strong growth
Shares of PayPal (NASDAQ: PYPL) have surged from around $US77 ($109) late last year to probe record highs above $US97 in late February on the back of analyst upgrades and overall optimism for the company.
In its latest financial update during the US reporting season, PayPal delivered strong results that should make every investor happy.
For example, full-year earnings per share (EPS) were up 16% and the number of active accounts rose by 17%, which pushed the total number of active accounts to 267 million users. In the last quarter of 2018 alone PayPal added a record of 13.8 million new accounts, according to company reports.
The positive numbers and the equally buoyant outlook are more than enough for analysts to increase their share price target. Many analysts tracking the digital online payment industry agree that PayPal is on track to hit $US100-$US110 per share, with solid upward momentum suggesting even greater gains are achievable.
So what's behind the strong numbers?
While PayPal enjoys a dominant and strong brand recognition in the digital and online payment industry, it must be reassuring for investors to hear what PayPal president and CEO Dan Schulman has to say about the company's strategic direction.
In an interview during the release of the company's financial results, Schulman was quoted as saying: "In 2018 we set new benchmarks for the company for revenue, net new active accounts and engagement across our platform. We launched new products, strengthened existing relationships and entered into new strategic partnerships with some of the biggest and most influential global brands in technology, retail and finance. We greatly expanded our global reach, serving 267 million customer accounts, including 21 million merchant accounts."
Schulman's statements did not only signify a solid strategic direction for the company. He's also convinced that the digital payment industry will continue to grow as more people and businesses use digital online payment platforms.
In another interview around his company's financial report, Schulman said: "We live in the space of digital commerce and digital commerce is exploding still around the world."
He added: "P2P, or peer-to-peer payments, is exploding in the market. It's a multi-hundred-billion-dollar marketplace. This will definitely not be a winner take all."
PayPal's key business drivers
- PayPal processed $US164 billion in total payment volume (TPV) in the fourth quarter, representing growth of 23%.
- Merchant services volume grew 29%.
- Person-to-person (P2P) volume grew 46% to more than $US39 billion and represented 24% of TPV in the fourth quarter. In 2018, P2P volume grew 49% to about $US139 billion.
- Strong mobile engagement on PayPal's platform contributed to about $US67 billion in mobile payment volume in the fourth quarter, growing about 40% year over year.
What is PayPal and what does it do?
PayPal describes itself as a global technology platform and digital payments leader.
Founded in 1998 by some of the world's most famous investors, including Elon Musk and Peter Thiel, PayPal operates a worldwide payment system that supports online money transfers. It also serves as an electronic alternative to traditional paper methods of money transfer such as cheques and money orders.
In 2002, PayPal had its initial public offering. Later that year the company was acquired by eBay. In 2014, eBay announced plans to spin off PayPal into a separate company. The spinoff was completed in July 2015.
The PayPal online payment system is also used for online transactions, e-commerce, auction sites and other commercial transactions. In a way, PayPal competes with different financial institutions such as banks and credit card companies. But it also works with those companies in terms of facilitating an efficient online payment system.
Industry trends boosting PayPal
While PayPal is popular and widely used by individual consumers, the company also enjoys a strong presence in the corporate digital payment industry.
It already has relationships with e-commerce giants like Amazon and Alibaba. According to PayPal this type of e-commerce partnerships are delivering about 40% year-on-year growth, more than enough to offset any slowdown in transactions on eBay.
Looking at other growth sectors, Schulman said he is confident that the growth in the financial technology industry will drive further demand and boost the digital payment sector.
At the same time, PayPal continues to expand its global footprint as it enters additional markets. Schulman said that Asia, which includes India, China and Japan, is one of the fastest growing markets for PayPal.
In November 2018, PayPal acquired Hyperwallet, a Vancouver-based fintech start-up, for about $US400 million.
According to a company statement, the Hyperwallet acquisition will strengthen PayPal's payout capabilities and enhance PayPal's ability to provide an integrated suite of payment solutions to e-commerce platforms and marketplaces around the world.
A look at PayPal's share price movement
If you invested $US10,000 in PayPal when it listed in July 2015 at $US38, your investment would now be worth more than $US25,000 as the shares close in on the $US100 mark.
Though the past six months have been volatile for PayPal, this activity reflects broader market moves since the correction in October 2018. From the lowest close of December at $US77.06 the shares have since staged a strong rally, climbing 27% in just over two months.
Considering the strong resumption of the underlying upward trend in PayPal's share price and extension to new all-time highs, it seems that the stock is enjoying support from investors.
Analysts are also mostly bullish and have recently upgraded their outlook for PayPal based on industry developments and ongoing demand for online digital payment services. Despite other online payment platforms coming into the market, it seems PayPal has been able to capitalise on its strong brand and continuing innovation.
With the benefit of relationships already established with some of the world's e-commerce giants, PayPal looks set to continue to benefit from further growth in digital and online technology systems and services.
Given all these positive factors, we see PayPal as a buy.