PayPal Holdings Inc Is a Better Bet on Financial Services
PayPal Holdings Inc (NASDAQ:PYPL) has $7 billion of cash in the bank and no debt.
Given its persona as the once-exclusive payment processor for mother ship eBay Inc (NASDAQ:EBAY) and recent parent of peer-to-peer payment app Venmo (extremely popular with millennials and Gen Zers), it seems more like a debt-fueled young tech firm launched out on its own from its mother ship.
But that’s far from the case. PYPL has had a very busy 2018.
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First, given its very strong performance — it’s up 60% in the past year — thanks to Venmo’s popularity, which has given it a new growth track, EBAY announced in February that it was going to wrap up its transition out of PYPL as soon as possible. EBAY is also looking to transition to a new in-house payments processor that will help raise its margins.
This announcement is a sign of success for PYPL, not a sign that it’s getting dumped.
PYPL stock actually has suffered from this announcement as some analysts are still clinging to the idea that without EBAY, it is just another payments solutions company without its biggest client.
That’s why PYPL stock is only up around 10% year to date. But it’s analysts’ ambivalence that spells opportunity.
Remember, activist investors wanted PayPal spun off from eBay because they saw the growth potential in PYPL as financial technology (fintech) was undergoing a significant transformation.
Yet now that PYPL is succeeding in this new fintech world, some analysts are bemoaning its divorce from its slow-growth partner.
Another classic example of Wall Street’s attachment to the former PYPL instead of the current one is with PayPal’s recent $2.2 billion all-cash purchase of iZettle, a Swedish firm that has significant small- and medium-sized business exposure in Europe and Latin America.
You would think analysts would be thrilled. It’s an all cash deal that still leaves two-thirds of its cash hoard intact, yet it gains exposure in significant emerging and developed markets with a strong support team in place.
Since it’s all cash, it doesn’t hurt shareholders and it isn’t adding debt in a time of rising interest rates. What’s more, since the dollar has weakened, all the revenue that will now come in from its international operations will have more impact on PayPal’s bottom line.
Speaking of bottom line, PYPL had a very bullish Q1 earnings release in early May to underscore its growing operations.
Revenue for the quarter was up 24% from the same quarter last year, which was more than even the company expected and easily overshot analysts’ expectations.
It also easily beat analysts’ earnings expectations, up 33% compared to last year. And most important, new active users was up 35% and transactions were up 25% for the quarter.
All this and no debt, with $5 billion in the bank and sensible expansion plans.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
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