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Buy PayPal Stock for Contactless Payment and E-Commerce Trends

Larry Ramer

PayPal (NASDAQ:PYPL) is poised to benefit from new trends spurred by both the novel coronavirus pandemic and the e-commerce revolution. Moreover, PYPL stock is far more attractive at this point than rivals Square (NYSE:SQ) and Shopify (NYSE:SHOP).

pypl stock

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With e-commerce exploding, PayPal should get a lift as millions more customers utilize it to pay for their online purchases. And importantly, PayPal has heavy exposure to many of the large e-commerce businesses whose sales are currently booming. eBay (NASDAQ:EBAY), Walmart (NYSE:WMT) and Home Depot (NYSE:HD) are among the companies with huge e-commerce revenues that accept PayPal.

While PayPal still can’t be used as a payment method on Amazon (NASDAQ:AMZN), the biggest e-commerce player of them all, I think Jeff Bezos could decide to accept PayPal within a year or two. PayPal continues to expand. Soon, Bezos won’t want to lose sales by continuing to refuse a partnership.

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This exposure to huge companies should largely insulate PYPL stock from the bankruptcies of smaller businesses during the recession. That isn’t the case for Square and Shopify, which earn a majority of their revenue from small and medium businesses.

PYPL Stock Will Benefit From Market Share Gains

PayPal looks poised to take significant market share from the large credit card networks, including Visa (NYSE:V) and Mastercard (NYSE:MA). Of course, the e-commerce boom will contribute to that phenomenon. But I believe that, as the pandemic continues, many smaller businesses will start accepting PayPal payments alongside credit cards.

When customers pay for products or services with credit cards, they often have to come fairly close to cashiers or whoever is carrying Square’s payment machine. And to use credit cards, consumers have to press buttons on the same machine that many other people have touched.

Of course, PayPal allows users to pay for products and services without touching a shared machine. Therefore, I believe that many businesses will look to accommodate consumers who are very worried about the virus by accepting PayPal as a payment method.

Strong April Results

As most of the U.S. and Europe went into lockdown in April, PayPal’s business soared.  In conjunction with its first-quarter results, PayPal reported that its net new active users had jumped 140% in April versus January and February.

It also added 7.4 million net new customers in April, and CEO Dan Schulman provided guidance for “15 million to 20 million net new active accounts [that] we anticipate adding in Q2.”

As the company continues to add new users, a virtuous cycle should be created. Specifically, as more users are added, more businesses will accept PayPal. And as consumers see that more businesses are accepting PayPal, more of them will sign up for the service. That cycle should accelerate over time.

PayPal’s Honey Catalyst

Honey, an app which PayPal acquired last year, automatically provides users with discounts and notifies them when the prices of items they’re interested in drops by a certain percentage. Schulman believes that the data that Honey generates will be lucrative for merchants, and he thinks that the app will eventually be able to automatically purchase products for consumers when items fall to a certain price.

Honey is already quite valuable for consumers because of its ability to automatically apply coupons. As a result, the app will likely spur many more users to join PayPal.

If Honey can make automatic purchases at certain price points, PayPal will become even more valuable to consumers. And PayPal may be able to generate meaningful revenue by selling the data that Honey collects to merchants.


Valuation and the Bottom Line on PayPal

PayPal is trading at a forward price-earnings ratio, based on analysts’ average 2020 earnings per share estimates, of 43. That’s a bargain for a rapidly growing tech name like PayPal.

Moreover, the company’s actual forward P/E ratio may be meaningfully lower because, given its rapid growth recently, many analysts are probably underestimating its 2020 EPS. Square, by contrast, trades at a forward P/E ratio of 133.

PayPal’s shares trade at a trailing price-sales ratio of 9.4. In comparison, Shopify stock trades at a trailing P/S ratio of 48.

Given PayPal’s positive catalysts and relatively low valuation, investors should buy PYPL stock now.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any shares of the aforementioned companies.

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