Investing behind broad secular trends that are shaping the economy can be a shrewd way to allocate capital. The blending of financial services and technology is one exciting area. To be more specific, one company that has long dominated electronic payments deserves a closer look.
For investors wanting to gain exposure to the fintech niche , it's a smart idea to consider PayPal Holdings (NASDAQ: PYPL) . Here's why this incredibly cheap stock should be on your radar.
Too cheap to ignore
Since their spinoff from eBay in July 2015 to their all-time high in July 2021, PayPal shares were up an astronomical 740%. However, it's been a sad story after that point. The stock currently trades 77% below the peak and at a forward price-to-earnings ratio of 16.4.
It's important to try to figure out why the market has soured on a particular business. In this instance, I believe two potential reasons stand out.
The first one might be slowing growth. Revenue and its user base were expanding like wildfire during the depths of the pandemic. But economic normalization ended that surge, as in-person shopping bounced back.
Competition could also be a key factor for why shares have tanked. While PayPal has been a leader in digital payments for two decades, rivals are now finding success.
The most formidable opponent has to be Apple Pay. According to Insider Intelligence, this service is used by 60 million people in the U.S., a figure that keeps rising with each passing year. Apple Pay is especially popular for in-store transactions.
Because Apple owns the software platform used on its array of devices, the service is in an enviable position to be a consumer's payment method of choice. The iPhone essentially becomes a credit card with two taps of a finger.
The market might be right to be concerned about these issues. However, PayPal's cheap valuation more than makes up for these known risks. This is still a solid business for your portfolio.
Reasons to own PayPal
PayPal's growth is slowing, but not as much as the stock's performance would suggest. Even in an uncertain economy, the company is expanding. Revenue was up 8.5% in 2022 and 8.2% in 2023, before rising 8.8% through the first six months this year. These are still very healthy gains.
That top-line growth has been driven by consistently higher volume. PayPal handled total payment volume of $417 billion in the second quarter (ended June 30), which was 142% more than in the same period in 2019 prior to the pandemic. Clearly, the business hasn't given up the progress it made, even as consumer behavior has normalized somewhat.
With e-commerce spending estimated to rise at an annual pace of 11.6% globally through the end of the decade, PayPal should benefit from a powerful tailwind.
The company is also extremely strong financially and is a moneymaking machine. After raking in $4.2 billion in free cash flow in 2023, management believes the business can register $6 billion this year. And because the stock is so cheap, there are plans to aggressively repurchase outstanding shares, a smart move.
Another must-know reason to buy this stock is PayPal's network effect, which makes up its economic moat . The company has 429 million active accounts, including merchants and consumers. Consequently, this is a two-sided platform that gets more robust the larger it gets, as the value for both user groups increases. This helps to protect its competitive position.
Shares might be a bargain, and this fintech is one to add to your portfolio.
Should you invest $1,000 in PayPal right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and PayPal. The Motley Fool recommends eBay and recommends the following options: short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy .
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