Payment processing stocks have been the place to invest over the past decade. The capital appreciation many of these stocks have provided to investors, relative to the overall market, is incredible.
In the case of mega-cap payment processing company PayPal (PYPL), the results are clear. An investment in PYPL stock five years ago would have become a 5-bagger. For growth investors, that's some pretty serious growth in a relatively short time frame. (See PayPal stock analysis on TipRanks)
There’s a reason for this outperformance. PayPal has been growing its revenue at a rapid clip (nearly 250% aggregate revenue growth since 2015). Better yet, the company has been growing its earnings per share at an even faster clip (nearly 450% EPS growth over the same time frame).
How has PayPal accomplished this feat?
For one, the company has built built an e-commerce payments ecosystem that provides a very wide moat. The business possesses a competitive advantage that makes it difficult for rivals to wear down its market share. Many investors and analysts believe this moat cannot be penetrated.
Significantly for investors, the stock price appreciation PayPal has garnered in recent years has aligned very closely with its EPS growth rate. In other words, this stock isn’t any more expensive today than it was back in 2016, relative to its earnings.
Let’s dive into just how big this moat is, and why investors remain bullish on PayPal at these levels.
PayPal’s Market Share a Sight to Behold
PayPal’s platform has grown in ubiquity for various reasons. Some cite the fact that credit cards aren’t necessary for this platform. That substantially reduces security fraud risk for those concerned about making online payments. Others believe it’s the company’s rock-solid customer service team that handles disputes like professionals.
Whatever the reason, PayPal’s existing market share is one thing for certain: a sight to behold.
Currently, PayPal has approximately 55% of the U.S. online payment processing market. Its next closest competitor is Stripe, which garners a bit under 19% of the market.
In other words, PayPal is approximately three times larger than its nearest competitor. It owns more than half of a massive market, and continues to become more profitable every year.
Now, market share leads don’t always translate into long-term cash flow growth, as they have in the case of PayPal. There are some who believe Stripe or other competitors can chip away at PayPal’s lead.
Fortunately, PayPal’s integrated ecosystem does provide this company with a formidable moat. The company processed more than 15 billion transactions in 2020, with over 337 million users and merchants using PayPal.
Until the competitive landscape changes, it’s hard to take a bearish view on this stock over the long-term.
What Analysts Are Saying About PYPL Stock
According to TipRanks’ analyst rating consensus, PYPL stock comes in as a Strong Buy. Out of 22 analyst ratings, there are 20 Buy recommendations and 2 Hold recommendations.
As for price targets, the average analyst price target is $317.50. Analyst price targets range from a low of $256.00 per share to a high of $375.00 per share.
PayPal’s market dominance is perhaps the key reason to own this stock. It is true that competitors continue to vie for more market share, and over time, PayPal will likely have to either continue to innovate or face the repercussions of this reality.
At the same time, going with the market leader does have its advantages. It’s hard to argue with the moat PayPal has built around its operations. Long-term investors would be well-served to continue holding this stock at these levels. Not only is it reasonably priced, but the company's cash flow continues to grow.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer : The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.