Investors can’t get enough of PayPal Holdings.Its shares have rocketed 23% this year, to $306, for a market value of $339 billion.Mastercard and Visa,the two big card-processing stocks, have been hurt by lower payment volumes during the pandemic, particularly in highly profitable cross-border transactions. Both are slightly down over 52 weeks. Mastercard’s stock, at $335, was worth $332 billion.
In a strategy presentation this past week, PayPal saw nearly every facet of its business doubling over the next five years: 750 million active accounts by 2025, up from 377 million, payments volume of $2.8 trillion and more than $50 billion in revenue, up from an estimated $26 billion this year, better operating margins and earnings, and $40 billion in free cash flow, 30% to 40% for share repurchases.
MoffettNathanson’s Lisa Ellis notes that PayPal has stepping stones to reach those numbers. One is a new service called Buy Now Pay Later, an interest-free installment plan with $750 million of transaction volume in the fourth quarter. Another is cryptocurrencies. Users can buy and store them on PayPal’s app, and PayPal wants to use crypto with merchants; Bitcoin’s rise seems to be driving greater usage. The company also aims to expand its Venmo service for business payments and grow its contactless payments technology in stores.
Does this warrant a steep premium to Mastercard? The card giant’s revenue and EPS should exceed PayPal’s in fiscal 2021, says Ellis. But the five-year outlook favors PayPal. Is PayPal’s valuation too rich? At 67 times estimated 2021 earnings, the stock is pricier than the S&P 500’s 23 multiple or Mastercard’s 42. But PayPal keeps rising.
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