PayPal (NASDAQ:PYPL) is on a roll recently. With its new partnership with Apple (NASDAQ:AAPL), you will soon be able to use PayPal to purchase items on the iTunes App Store. PayPal has solidified itself as a large player in the payments industry by partnering with almost every major payment company or competitor. Not only is it a huge success, but the company also owns Venmo, a fast-growing app that millennials love to use. In this article, I outline Venmo's success and why PayPal stock should be in everyone's growth portfolio.
Venmo is Loved and Used by Many
Venmo seems to be very popular with millennials, as it makes splitting purchases easy, is fun to use, and allows people to interact in a new way. On Venmo's official blog, you can see new features that make the app so popular. You can use countless emojis to describe payments. Venmo even has customized emojis for festivals.
(Source: The Venmo Blog)
Venmo can also be used within iMessage to send payments. The video below shows how truly simple it is to pay using Venmo.
It is hard imagine another peer-to-peer payment network that will be able to grow as fast as this one in the future. Venmo is widely used by millennials, it is easy to use, and many enjoy using it.
Venmo Represents an Opportunity for Long-Term Sustainable Growth
As the shift to mobile payments continues, Venmo is experiencing dramatic growth. According to PayPal's Q1 press release, the app processed $6.8 billion in total payment volume in the quarter, which represents over 100% growth from the same quarter last year. It is hard to find growth that impressive anywhere. See the table below that was created by looking at the company's earnings releases.
(Source: Jones, Brock "Venmo Total Payment Volume Growth")
Venmo appears to have a large runway of growth ahead of it, as it is still in its early stages of adoption, growing over 100% year over year in each of the last three quarters. With this growth in peer-to-peer payment volume, PayPal is searching to monetize Venmo to create future profits. Over the last year, Venmo has begun to allow users to pay some merchants through the app. In the future, it could replace credit cards, as Venmo accounts are linked directly to bank accounts. This could allow PayPal to charge a small fee to the merchant each time a user buys with Venmo, like credit card processors do now. It is difficult to quantify the revenue this could produce, but as mobile payment adoption continues in the U.S. and around the world, Venmo has the opportunity to produce billions of dollars in future free cash flow. Not to mention, PayPal as a whole already produces almost $2.5 billion in free cash flow and has no debt.
PayPal is Reasonably Priced
Currently, PayPal is reasonably priced for its current trajectory and growth capabilities. Its market capitalization is just under $70 billion, and it is currently at its 52-week high. As you can see below, PayPal stacks up well compared to FANG stocks when you compare the enterprise value to EBITDA. See the table I made using each company's most recent 10-Q and 10-K below.
(Source: Jones, Brock "EV to EBITDA Table for FANG and PayPal")
The EV-to-EBITDA ratio is used to measure the cost of the entire enterprise regardless of its capital structure. With PayPal's growth potential, it seems to be at a reasonable figure of 27.63.
Not only does PayPal seem fairly priced based on its EV/EBITDA, it also produces large amounts of cash. The company has just issued a repurchase program to the tune of $5 billion. With no debt and high amounts of free cash flow, it can return lots of cash to shareholders. PayPal's ability to return cash to shareholders, while still having massive growth opportunities, shows how great its business really is.
PayPal has solidified its place in the payments industry and has a clear pathway to long-term growth through Venmo. It is also reasonably priced according to the EV/EBITDA ratio, and produces large amounts of free cash flow. PYPL is an excellent stock for long-term growth investors to add to their portfolios.
Disclosure: I am/we are long PYPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long PayPal call options