This low risk action is a long term winner

Tthere is no such thing as a risk-free stock. That said, there are ways a business can protect itself. A trusted brand can make it an easy choice for busy consumers, and a huge market opportunity can guarantee it permanent room for growth. Meanwhile, strong competitive advantages can help fend off competitors.

PayPal funds (NASDAQ: PYPL) is a prime example of all three. This payments innovator has a history of outperforming, growing over 700% over the past five years. But it still looks like a long term winner today. Here’s why.

Image source: Getty Images.

Competitive advantage

PayPal operates in more than 200 countries and regions, and its digital payment platforms have 392 million active accounts, including 31 million merchants. This scale is a significant advantage and it fuels the network effect that drives PayPal’s business. Here’s how it works: As more and more consumers use PayPal, merchants benefit from an increasing number of potential buyers; and as more merchants join PayPal, consumers benefit from a growing number of accepting sellers. This self-reinforcing cycle is a powerful lever for growth.

To add, PayPal’s scale also created operating leverage. In other words, the company has become more efficient over time, as its operating margin has increased by 300 basis points since 2016. This increase in profitability means that PayPal can invest more aggressively in growth. which gives it an advantage over its less established competitors.

Finally, PayPal has spent the past 23 years building a brand of trust, and trust is an essential part of any financial transaction. For example, PayPal’s purchase protection policy covers both buyers and sellers, allowing them to use the platform risk-free. This should continue to stimulate growth in the years to come.

Global digitization

Digitization is reshaping the world. More and more people are connecting to the internet, shopping online and adopting digital wallets. Collectively, these trends create a great opportunity for fintech companies like PayPal.

According to a WorldPay report, digital wallets accounted for 45% of e-commerce payments and 26% of in-store payments in 2020. But those numbers are expected to grow to 52% and 33%, respectively, by 2024. Notably, PayPal has launched several new products last year which are in line with these trends.

For example, the company introduced Quick Response Code (QR) payments in May, allowing consumers to make in-store purchases using the PayPal and Venmo mobile apps. The product has already gained popularity. During the Q1 earnings call, CEO Dan Schulman said, “We now have nearly one million merchants who accept our QR codes.

Likewise, PayPal has partnered with Visa to launch the Venmo credit card in October. This allows consumers to fund their purchases with their Venmo account balance and improves PayPal’s ability to monetize the ultra-popular mobile app.

In the future, PayPal should benefit in other ways as well. For example, in 2020, the company acquired Honey, a rewards platform that helps consumers save money when shopping online. PayPal believes this will boost sales and customer engagement for its merchants while improving the shopping experience for consumers.

Considering these advantages, it’s easy to imagine the financial impact. By integrating Honey into its platform, PayPal is positioning itself further upstream in the customer journey, which means it will help shoppers find products, not just buy them. And by playing this role, PayPal should see a slight increase in total payment volume, which would increase revenue.

Financial performance

PayPal’s strong competitive position naturally led to impressive financial results. Since 2015, active accounts have grown 117% as digital commerce and electronic payments have become more popular with consumers.

During the same period, transactions per active account also jumped 50%, compounding the benefits of strong user growth. This metric is particularly important because it gets closer to user engagement. In other words, more and more consumers are joining PayPal. and they use PayPal products more frequently.

This dynamic has helped PayPal to grow its business rapidly.

Metric

2015

Q1 2021 (TTM)

TCCA

Returned

$ 9.2 billion

$ 22.9 billion

19%

Free movement of capital

$ 1.8 billion

$ 5.3 billion

23%

Source: PayPal SEC Deposits. TTM: 12 rolling months. CAGR: compound annual growth rate.

Going forward, PayPal’s great market opportunity, strong competitive position, and solid execution history should make it a long-term winner. In addition, the world is rapidly adopting digital solutions such as e-commerce and electronic payments. In other words, PayPal’s business seems to be on the right side of buying trends, and I think that limits the downside for long-term investors.

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Trevor Jennevine owns shares of PayPal Holdings and Visa. The Motley Fool owns shares and recommends PayPal Holdings and Visa. The Motley Fool recommends the following options: $ 75 long calls in January 2022 to PayPal Holdings. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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