Why PayPal Is a Good Buy, Even After Rising 75% Year to Date

Matt Thalman

Despite shares of PayPal Holdings (PYPL) rising 75% year to date, many investors would resist buying out of fear such a run cannot continue.

But after digging into the company’s most recent quarterly earnings, there is no sign PayPal’s growth is slowing. PayPal reported 8.2 million new customer accounts in just-ended quarter to bring its total active customer accounts to 218 million.

With an average of 32.8 payment transactions per active account on a trailing 12-month basis, PayPal’s customers are using their accounts. That led to the company processing 1.9 billion transactions in the quarter. Finally, this all ended with total payment volume of $114 billion, a 30% increase over the same quarter last year.

What is more interesting is that mobile payment volume increased by 54% during the quarter, but still only represents 35% of payment volume. This is one area that PayPal certainly should continue to see increase as one report believes the world-wide mobile payment market will climb by a compounded annual growth rate of 33% from 2016 until 2022.

While PayPal’s flagship product is impressive, it’s not the company’s only area of growth. Venmo, the social payments platform processed roughly $30 billion in total payment volume over the past 12 months. That represents a 106% increase from the previous 12 months. During the third quarter alone, the unit processed approximately $9 billion, a 93% increase from the same quarter in 2016.

This all ran down to the bottom line for PayPal and allowed the company to increase its earnings per share by 17%, from $0.27 per share in Q3 2016 to $0.31 per share in Q3 2017.

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Management expects to grow revenue by 20% to 22%, or $3.57 to $3.63 billion, in the fourth quarter. If revenue hits those targets, earnings per share should come in around $0.37 to $0.39. Wall Street analysts expect an even higher number of $0.42 per share. Regardless which number the company hits, if earnings run in the high $0.30-to-low-$0.40 range in the coming year, PayPal’s forward price to earnings ratio comes in around the mid-$30 range.

A fast-growing company trading for a price-to-earnings (P/E) ratio in the mid-30s is much better than its trailing P/E of 57. Since most investors wouldn’t think twice about buying a stock that is trading at 57 times trailing price to earnings, PayPal is off most investors’ radar for the time being. But as soon as the market wakes up and realizes PayPal’s real value and gets over the fact that the stock already has increased by 75% year-to-date, the stock will go on another run.

If you haven’t already started building a position in PYPL, buying shares before its trailing P/E ratio gets over 70 makes a lot of sense. Not only is PayPal still relatively cheap at today’s price, its operating in an industry that will grow for not only years, but likely decades as mobile payments become more secure and more convenient for consumers.

As of this writing, Matt Thalman did not own shares of any equity mentioned above.  Follow him on Twitter at @mthalman5513.

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