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1.4 Trillion Reasons to Like PayPal Stock

Motley Fool - Fri Aug 18, 5:45AM CDT

During the second quarter, PayPal(NASDAQ: PYPL) reported revenue of $7.3 billion and adjusted earnings per share of $1.16, both of which exceeded Wall Street estimates. The stock hasn't performed well, though, and it's down 19% since the earnings announcement and 42% in the past 12 months.

Investors are probably concerned that this fintech company isn't producing double-digit top-line growth anymore, especially after the monster gains of the past several years. However, there are still 1.4 trillion reasons to like the stock.

Let's take a closer look at one key metric PayPal shareholders need to know about.

A large and growing network

In Q2, the business processed $377 billion in total payment volume (TPV), up 11% year over year and almost triple the amount from five years ago in the second quarter of 2018. In the past 12 months, PayPal handled a whopping $1.4 trillion in volume. Because it generates fees on the activity on its platform, the higher TPV goes, the better it is for the company and its ability to generate revenue.

For comparison's sake, Visa, Mastercard, and American Express, which operate different business models than PayPal, processed $3.2 trillion, $2.3 trillion, and $427 billion in payment volume, respectively, in the three-month period ended June 30.

But while those businesses focus mainly on debit and credit cards, PayPal is a business that continues to be an important player specifically in the digital payments landscape. It's a seamless checkout option that's trusted all over the world, so the company's platform will benefit from the ongoing growth of online shopping. In fact, PayPal's digital wallet is accepted at 79% of the top 1,500 retailers in North America and Europe, well ahead of Apple Pay, which is in second place.

And on the unbranded side, PayPal's Braintree service is registering tremendous growth, with TPV up 30% year over year in the first half of 2023. It commands a leading share of 41% in the online payment processing market.

It's encouraging to see that TPV continues increasing at a healthy clip, especially when you consider that PayPal's active account base shrank from 433 million during the first quarter this year to 431 million in the latest period. Dan Schulman, the departing chief executive officer who will be replaced by Alex Chriss from Intuit, has emphasized trying to get PayPal's existing users to transact more, as opposed to focusing entirely on account growth. The strategy is working, as transactions per active account rose 12% to 54.7 in Q2.

That's a possibly more lucrative strategy, because chances are that it's far more expensive to bring on a new customer than it is to find ways to incentivize an existing account to direct more of its spending and payments activity to PayPal's platform. This could be playing out right in front of our eyes, as sales and marketing expenses declined 24% year over year in the most recent quarter.

Is the stock a buy?

PayPal is in a position to gain once the macroeconomic picture improves and discretionary spending picks up again, but is that enough of a reason to buy the stock right now? The company is definitely a leader in the electronic payments industry, which is a powerful secular trend playing out across the global economy. PayPal is also profitable from a free-cash-flow perspective, which can't be said about a lot of fintech stocks. Additionally, shares trade at just 12 times forward earnings per share, creating added upside for investors.

But there are also risks, particularly in regard to the CEO change. A new leader is always cause for concern because it could have a major impact on PayPal's culture and strategic direction. Moreover, company profitability could be under pressure as a result of the growth of Braintree because this segment carries lower margins than the flagship PayPal branded checkout service.

Investors have to decide if the positive factors warrant buying the stock today.

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American Express is an advertising partner of The Ascent, a Motley Fool company. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Intuit, Mastercard, PayPal, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard, short January 2025 $380 calls on Mastercard, and short September 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.

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