Given PayPal’s (NASDAQ:PYPL) continued, strong growth and its large user base, along with the low valuation of PayPal stock, I continue to believe that the shares will deliver strong returns over the long term. What’s more, the macroec0omic picture, although far from perfect for the company, should enable it to keep posting fairly strong financial results going forward.
But PayPal will face steeper competition from Apple (NASDAQ:AAPL) going forward. Although I don’t expect these developments to negatively affect its performance to a great extent, the company’s growth could decelerate somewhat in the wake of these changes. Also importantly, Wall Street seems to have lost confidence in PayPal following Apple’s moves, so PayPal stock is likely to fall further in the short- to medium-term. All in all, I currently view PayPal’s shares as a hold.
Continued Strong Metrics
In the first quarter, PayPal’s top line climbed 9.4% versus the same period a year earlier to $7.7 billion while its total payment volume jumped 14% year-over-year to $404 billion. Even more impressively, its payment transactions per active account climbed 13% year-over-year (YOY) to 60, showing that user utilization of the company’s services is meaningfully rising. Finally, its earnings per share, excluding certain items, soared 27% YOY to $1.08, while the active monthly user base of just its Venmo service in the U.S. came in at an impressive 60 million.
Also encouragingly, the number of first-time users of its debit cards rose 38% YOY last quarter, CEO Alex Chriss reported on its Q1 earnings call. Debit card users, on average, produce nearly 20% more revenue for the firm than accounts which don’t use debit cards, Chriss noted.
In a note to investors on May 31, research firm New Street Research started coverage of PayPal stock with a “buy” rating. New Street expects the company’s new guest checkout system, Fastlane, to lift its payments volume and it predicts the company will raise the prices on Fastlane in the future. Further, the firm expects PayPal to improve its monetization of Venmo and raise its debit card adoption rates in the medium term. And New Street predicts the company’s profit margins will beat analyst average estimates in 2025.
A Decent Macro Setup and a Low Valuation
U.S. retail sales only edged up 0.1% in May compared to April. But Marketwatch stated, “Sales are still rising at a pace consistent with stable growth.” Moreover, according to a survey conducted by well-respected consulting firm McKinsey, sizeable numbers of consumers expect to “splurge” in many categories going forward. For example, 39% of those polled anticipate they will splurge on restaurants, while a third intend to spend a great deal on apparel. Another third say they’ll splurge on travel. Also importantly, inflation did not rise at all last month. If that trend continues, investors may feel freer to spend more on discretionary items going forward.
On the valuation front, PayPal has a forward price-to-earnings ratio of 14 times. Given its strong growth, that’s a very low P/E ratio.
Apple’s Moves Have the Street Worried
Earlier this month Apple introduced Tap to Cash which allows iPhone users to transfer funds by tapping their devices against other iPhones. The tech giant also disclosed that it would allow iPhone owners to “access installment loans offered through credit and debit cards, as well as lenders, when checking out with Apple Pay.” And finally, the company will allow consumers to use Apple Pay on desktop browsers other than just Safari.
Wall Street appears to be meaningfully less upbeat on PayPal stock in the wake of Apple’s annoucement, as the shares fell about 10% in the week following the software giant’s news.
Not a Game Changer
I don’t expect Apple’s initiatives to be a game changer for PayPal. First of all, according to one estimate, PayPal’s market share of online payments was 56% last year while Apple’s was just 12.6%. So even if the changes boost Apple’s market share by 20 percentage points, all at PayPal’s expense, the latter company would lose less than five percentage points of its share.
But I don’t expect that scenario to materialize. Most consumers don’t exchange money with their peers in person so the Tap to Cash feature probably won’t be too popular. And PayPal has a big first-mover advantage on Apple when it comes to exchanging money on desktops. Finally, Apple has partnered with credit card issuers in the past and PayPal already faces multiple competitors that offer online loans, including SoFi (NASDAQ:SOFI) and Zelle. As a result, I don’t expect Apple’s new partnerships with card issuers and lenders to be much of a negative needle-mover for PayPal.
The Bottom Line
Although I don’t expect PayPal to take a big hit from Apple’s moves, the fintech firm could suffer market share losses of a few percentage points, further spooking the Street in the process.
What’s more, due to PayPal stock’s negative momentum, the shares are likely to keep falling for a while longer. As a result, I believe that investors will have an opportunity to buy the shares for significantly below their current price relatively soon. That’s why I view the shares as a hold rather than a buy.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
