PayPal Holdings Inc.'s (PYPL, Financial) growth story is still in its relatively early stages. The company’s focus on improving customer loyalty and increasing user engagement may help to strengthen its competitive position in what is a large and growing total addressable market.
A focus on innovation could win new customers. The growing popularity of its digital products could lead to opportunities for monetization, while new card launches may allow the company to capitalize on underserved consumers and markets.
In the last year, PayPal's stock has gained 43% versus a 16% rise for the S&P 500. Through further acquisitions and partnerships, the company could continue to outperform the wider index.
Increasing popularity
A potential catalyst on PayPal’s bottom line is its peer-to-peer payment system, Venmo. It is gradually becoming monetized, with 17% of the app’s users engaging in a monetized experience. The payment app’s usage has increased 25 times over the last four years so that it now accounts for around 10% of the company’s total transaction volume. It processed $14.2 billion in payments during the most recent quarter. Although it may take a number of years for the app to be fully monetized, it could make an increasing contribution to the company’s top line.
PayPal’s new card launches have the potential to boost engagement and win new customers. The PayPal cash Mastercard was launched earlier this year, combining many of the features of prepaid and debit cards. It could help the business access the 30 million consumers in the U.S. who are categorized as "financially underserved." The launch of the Venmo debit card could create new transaction possibilities as well. It may also increase user engagement through providing additional flexibility for customers. New cards helped increase transaction volumes by 9% in the most recent quarter.
Growth strategy
Partnerships are increasing the company’s presence in a number of markets, such as the U.K. Banks are seeking to partner with the business in order to become the chosen option in their customers’ PayPal wallets. In return, they are incentivizing customers who use the platform. For example, Korean credit card issuer Shinhan Card promotes PayPal registration through its own app. The partnerships strategy has the potential to increase the adoption of the brand.
Demand for the company’s services from merchants is increasing. Around 19 million merchants already accept PayPal, but this figure could increase due to the strong customer loyalty the company enjoys. It is estimated that PayPal conversion is 60% higher than other digital wallets. This signals to merchants they could generate higher sales from offering PayPal as a payment option, meaning the number of sign-ups increases. Customer loyalty could be boosted in the future by further innovation, such as One Touch checkout. This enables payment from a mobile device without the need to retype passwords at different merchant sites.
Potential threats
Competition facing the company continues to be relatively high. Although its Venmo app has increased in popularity in recent years, the total number of downloads of rival Square’s (SQ, Financial) Cash App recently overtook it. The total addressable market for the business is estimated to be $100 trillion worldwide. With revenue of $13.09 billion last year, it is not the dominant player in the industry. It may, therefore, have a less resilient business model than expected.
Since the company’s revenue growth is closely linked to spending levels, the threat of a full-scale global trade war is a risk to its financial performance. Further tariffs could lead to downgrades in global gross domestic product growth. The International Monetary Fund projects the recent round of tariffs announced by the U.S., China and other major economies could wipe 0.5% from the global GDP by 2020.
Outlook
Given the size of the total addressable market, the stock may not be operating in an industry that is a zero-sum game. There may be a number of eventual winners as the line between online and offline continues to blur. Acquisitions could help the company to overcome potential threats from changing consumer tastes, as well as from improved technology. It is targeting a spend of between $1 billion and $3 billion per year on mergers and acquisitions. Global GDP growth is forecasted to be 3.9% in 2018 and 2019 according to the IMF. The company’s operating environment may, therefore, remain positive and provide it with a tailwind.
Investment potential
The company’s focus on innovation and improving customer engagement could lead to rising sales and profitability. New card launches and the monetization of Venmo could act as future catalysts on its top line, while partnerships and a focus on customer loyalty may lead to increased adoption by merchants and consumers.
Although the company operates in a highly competitive marketplace, acquisitions could provide a means through which to hasten the adoption of technological change and adapt to evolving consumer tastes. After a year of stock price growth, the company appears to have investment potential.
