Continued inflation and aggressive rate hikes have convinced many investors that the economy is headed for recession and that fear has weighed on the stock market. The Nasdaq composite is currently down 22% from its high, putting the widely followed index in bear market territory.
In the short term, that reaction makes a lot of sense. Rising prices will eventually put pressure on consumer spending, dampen demand for discretionary items and slow economic growth. But inflation is ultimately temporary and the market has inevitably recovered from any previous downturn. That means that the current situation is actually a good time to buy stocks.
With that in mind, PayPal Positions (PYPL 2.01%) is currently 68% below its high and the stock looks too cheap to pass up.
Strong market position
The PayPal brand is synonymous with digital payments. It operates a two-way platform and offers products that appeal to both businesses and consumers. That sets the company apart from many other payment processors, allowing PayPal to use consumer data to more effectively prevent fraud and store deals that boost sales for merchants.
On one side of the ecosystem, PayPal enables businesses to accept payments, both online and in stores, and offers adjacent solutions for risk management, financing and POS systems. On the other hand, PayPal offers debit cards and digital wallets that allow consumers to spend and save money, invest in crypto, discover shopping ideas and earn rewards.
The broad scope of its two-sided platform has helped PayPal become the most widely accepted digital wallet in North America and Europe. Better yet, the company has built a trusted brand, and that reliability increases conversion rates by 34% compared to other checkout options. That makes PayPal a particularly attractive business partner, and the company recently partnered with Shopify, DraftKingsand Roku.
On the financial side, PayPal grew 6% last year with active accounts – management expects that figure to accelerate in the coming quarters – and transactions per active account grew 12%, indicating an increase in engagement. As a result, revenue increased 9% to $6.8 billion and free cash flow increased 22% to $1.3 billion.
Great market opportunity
PayPal estimates the total addressable market (TAM) at $110 trillion, but the company handled only $1.3 trillion in total payment volume last year, which represents about 1% of its TAM. That leaves plenty of room for future growth and PayPal should benefit from several catalysts in the coming years.
Firstly, online shopping is becoming more and more popular and that trend will of course drive the growth of digital payments. Second, the number of digital wallet users is expected to double between 2021 and 2025, according to Juniper Research. At the same time, digital wallets will continue to gain market share over cash and debit cards in North America and Europe, both in-store and online, according to data from Worldpay. And third, PayPal’s management team is executing a strong growth strategy.
In particular, the company plans to focus on three opportunities: PayPal and Venmo’s digital wallets, PayPal Checkout and Braintree, a more customizable payment solution aimed at larger e-commerce businesses. Management believes the strategy will drive operating margin growth starting in the fourth quarter of this year and continuing through 2023.
In short, PayPal benefits from a strong market position and huge market opportunities, and its profitability will increase in the coming years. In addition, stocks are currently trading at 4.2 times sales – a monster discount compared to the five-year average of 42.8 times sales. Therefore, you will regret not buying this growth stock on the dip.
Trevor Jennewine has positions in PayPal Holdings, Roku, and Shopify. The Motley Fool holds positions in and recommends PayPal Holdings, Roku, and Shopify. The Motley Fool recommends the following options: long January 2023 calls $1,140 on Shopify and short January 2023 calls $1,160 on Shopify. The Motley Fool has a disclosure policy.