PayPal (PYPL) Stock Forecast & Analysis

Updated: 3rd Jan 2022 Written by Sean Graytok
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PayPal is one of Silicon Valley’s prized possessions. It operated in the shadows for decades, but investors are now waking up to its potential to become one of the best fintech stocks.

What is PayPal?

PayPal was founded in 1998 by the pioneers of Silicon Valley. This group is often referred to as the “PayPal Mafia”.

It includes the likes of Peter Thiel, Elon Musk, Reid Hoffman, Steve Cohen, Keith Rabois, David Sacks, and many others.

PayPal is Silicon Valley’s great incubator: Peter Thiel’s cyber fraud detection software at PayPal led to Palantir (PLTR), and Elon Musk’s PYPL money made Tesla (TSLA) and SpaceX (and now Starlink) possible.

Today, PayPal is a financial technology platform and digital payments company that enables digital and mobile payments for consumers and merchants. PayPal was spun off from eBay in 2015 to unleash its potential as a standalone business.

PYPL was “fintech” long before the term even existed and is leveraging its first-mover advantage to facilitate the shift to a cashless society — a trend that was accelerated by the COVID-19 pandemic.

While this company is more than decades old and has a market cap of $280 billion, it continues to innovate and add new products at an impressive rate. Let’s explore PayPal stock’s investment potential.

PayPal Stock Bull Case

#1. Digital Wallets – Venmo

Digital wallets are smartphone-enabled financial ecosystems that provide access to various services, including wealth management, insurance, instant payments and crypto-assets.

PayPal’s Venmo is the largest peer-to-peer (P2P) payment application and digital wallet in the U.S. It has benefited from its first-mover advantage, initially launching in 2012 and building its network effects ever since.

The only other player in the P2P payment application space is Square’s Cash App, which launched a year after Venmo but struggled to find its footing until 2017.

While the Cash App is gaining on Venmo, we believe the two will coexist and mutually benefit from the rise of digital wallet adoption.

#2. PayPal “Super App” in 2021

In PayPal’s recent earnings call, CEO Dan Schulman revealed the company’s plans to build out their digital wallet into a single “Super App” that transcends across commerce and financial payments.

Integrating PayPal and Venmo into a single app will consolidate its base of users and centralize its suite of offerings that go beyond payments.

This new app should significantly increase consumer engagement and will include:

  • P2P Payments
  • Buy, Sell, and Hold Crypto
  • Buy Now, Pay Later (BNPL)
  • Direct Deposit
  • Check Cashing
  • Bill Payment capabilities
  • QR codes for in-store purchases (accepted at 600,000 retail locations)
  • Venmo Credit Card
  • Budget & Savings Tools
  • Investment Alternatives
  • Honey’s entire suite of shopping tools (wish list, price monitoring, deals, etc.)

#3. Crypto

PayPal’s crypto initiative has “exceeded management’s projections” after launching late last year.

Customers who purchased crypto on PYPL’s platform are logging into the app twice as often as prior to buying crypto.

Bitcoin is volatile, so users check its price more frequently than they would Ford (F). 

Not only will PYPL benefit from bitcoin transaction fees, but this increase in login frequency gives it more opportunities to cross-sell its host of products and services.

Related: Best Cryptocurrency Exchanges

#4. PayPal Ventures

The company has a venture arm called “PayPal Ventures” that invests in new fintech innovation.

Not only does PayPal benefit from the returns on these early-stage investments, but its active presence in the startup space allows it to identify disruptive fintech in its infancy.

PayPal Ventures doubles as an R&D department since it can look under these young startups’ hood and gain an edge over its competition.

PayPal Ventures has made several strategic investments:

  • Honey: Deal-Finding and Shopping Tool
  • iZettle: Payments Processing (to compete with SQ in Europe and Latin America)
  • Extend: Extended Warranty Startup
  • Divvy: Corporate Card and Expense Management Software
  • TAXbit: Cryptocurrency Tax Software
  • Modulr: Payment-as-a-Service Platform
  • Tink: European Open Banking Platform
  • Paxos: Blockchain Infrastructure Platform and Buy, Hold, Sell Crypto Partner

>> See: Amazon (AMZN) Stock Analysis?

PayPal’s Moat

Venmo has officially reached verb status — “Just Venmo me” — which validates and contributes to its network effect.

This reinforces engagement with the app and makes Venmo a “sticky” product. Here are some other companies that benefit from verb status:

  • “Google it.”
  • “Let’s Uber there.”
  • “Want to Zoom?”

PayPal’s moat is similar to that of social media platforms; you have Venmo because others have it, but the app’s financial aspect gives PayPal another layer of defense.

The social incentive to have the app so you can repay family and friends improves growth and retention.

PayPal enjoys a regulatory moat from FAAMG companies, too — Big Tech would love to make a significant foray into financial services, but fears of antitrust handicaps them.

Admittedly, this hasn’t stopped Apple Pay (AAPL) or Facebook’s (FB) Diem project, but P2P payment integrations are unlikely to come from Big Tech without major regulatory friction.

PayPal’s payments foundation enables it to vertically integrate an unlimited number of financial products.

Few other companies are positioned (or agile enough) to capitalize on the fintech boom like PayPal.

Note that financial services appear to be off-limits for the FAAMG stocks over fears of antitrust allegations.

PayPal will benefit from this regulatory moat that other sectors wish had existed prior to Big Tech entering and disrupting their markets.

PayPal Earnings

PayPal delivered a record performance in 2020; the CEO credits the historic year to releasing more products than ever before, dramatically scaling their worldwide adoption, and businesses of all sizes digitizing in the wake of the pandemic.

Let’s look at the highlights from PYPL’s Q4’20:

  • Total Payment Volume (TPV) of $277 billion, growing 36% YoY
  • Net Revenue of $6.12 billion, growing 23% YoY
  • GAAP Earnings-per-Share (EPS) of $1.32, up 208% YoY
  • Added 16.0 million Net New Active Accounts

FY’20 was the strongest performance in PayPal’s history:

  • TPV of $936 billion, up 31% YoY
  • Net Revenue of $21.45 billion, up 22% YoY
  • GAAP EPS of $3.54, up 71% YoY
  • $5.0 billion in Free Cash Flow, up 48% YoY
  • Added 72.7 million Net New Active Accounts

PYPL delivered on growth, and then some, in FY’20:

  • Total Active accounts to 377 million, up 24%
  • 15.4 billion payment transactions, up 25%
  • Merchant Services volume grew 33%
  • Venmo processed approximately $159 billion in TPV, growing 56%
  • 42.7 payment transactions per active account, up 5%

PayPal also released its financial guidance for the next year:

  • Expects TPV to grow in the high 20’s on a percentage basis
  • Expect to add 50 million new accounts
  • Expects revenue to grow ~19% at current spot rate, to approximately $25.5 billion

PayPal shares shot up following these better-than-expected Q4 results, rising more than 3% in after-hours trading — a great way to finish off the stock’s 115% surge in 2020.

Related: Best Cybersecurity Stocks

PayPal Bear Case

Let’s play devil’s advocate and discuss some potential concerns with PayPal stock:

#1. Overvalued

Granted, what technology-related stock isn’t “overvalued” from a fundamental perspective? But PayPal might have had too good of a year in 2020 for investors eyeing the stock today.

The pandemic accelerated the “digital transformation”, and PYPL may have captured three years worth of growth in a single year.

This results in high expectations and the possibility of missing on growth or earnings projections, which could cause PYPL to pull back or flatline in the short-term.

#2. Square Continues its Rise

As previously mentioned, we believe that Square and PayPal will successfully coexist as P2P payment providers.

You have these apps because others have them (network effect), so it’s unlikely that people will be opposed to using both apps.

But that might not be the case with owning their stocks — many investors believe that Square is a better buy than PayPal.

Square is “closing the payment loop” better than PYPL because of its more popular Point-of-Sale (PoS) hardware and software.

PayPal’s new “QR Code Checkout ” is trying to even the score — it will take some time to catch up, but it’s off to a good start.

PYPL and Venmo QR codes have been implemented at more than 8,200 CVS Pharmacy locations. Approximately 600,000 merchants now accept PayPal and Venmo QR codes.

Investors will also point to Square’s higher growth potential, given its $102 billion market cap compared to PayPal’s $282 billion.

Regardless, it will be fun to watch these two continue their tango as they begin to compete in markets beyond digital wallets.

#3. Better Value Elsewhere in FinTech

PayPal is an expensive stock by any metric — those concerned with its valuation may find better value in the legacy payment providers, like Visa (V) or Mastercard.

These payment giants are embracing fintech innovation and acquiring or partnering with the disruptors, like PayPal.

Visa and Mastercard have a duopoly on payments and pretty much facilitate every financial transaction around the globe.

They are well-established, stable companies that are deeply embedded in the world’s financial system and are less risky investments than PayPal.

Learn More: Best Cloud Computing Stocks

PayPal Competition

Fintech is a hyper-competitive industry — here are PayPal’s top competitors:

  • Square (SQ)
  • Visa (V)
  • Mastercard (MA)
  • Affirm (AFRM)
  • SoFi (IPOE)
  • Apple (AAPL)
  • Fiserv (FISV)
  • Stripe
  • Clover

PayPal does not directly compete with some of these names, but we aren’t taking anyone off the table given the company’s ambitions.

Also, it’s common for an agile fintech company to vertically integrate other products once they establish their primary offering.

For example, PayPal is now competing for your bitcoin alongside:

PayPal is even competing against traditional banking institutions, like Goldman Sachs (GS) and JPMorgan (JPM).

Like Square (SQ), the company provides services to the “unbanked” or “under-banked” parts of the world.

See: Bitcoin vs Gold

PayPal Stock in Your Portfolio

Your allocation to PayPal depends on various personal factors, such as your investing goals, time horizon, and the amount of cash you’re willing to invest.

However, the following questions will help you gauge your conviction on PayPal stock:

  • Will PayPal continue to outperform the S&P 500?
  • Does PayPal have “Super App” potential?
  • Is there better upside in Square?
  • Will digital wallet adoption continue to increase or stall?
  • Is PayPal positioned well enough to benefit from mobile banking?
  • Can PayPal eclipse its bullish guidance projections?
  • Is PayPal overvalued, and does that matter?
  • Will crypto and bitcoin features add long-term value to PayPal?
  • Is QQQ or ARKK a better option for technology exposure?
  • Is PayPal’s moat large enough to fend off competitors?

Related: ARK’s Five Disruptor ETFs

How to Research PayPal Stock

The Motley Fool covers industry-disrupting stocks before they become mainstream. They advised investors how to play Ebay’s spinoff of PayPal in 2015, and those that listened were handsomely rewarded.

The Motley Fool also guides its readers on how to make money on the battle between PayPal and Square. Seek expert advice and team up with the Motley Fool today.

Another trusted resource is Barron’s Magazine; it’s been relied upon for its financial commentary for the last 100 years.

Barron’s recently published a piece on PayPal’s earnings and what it means for the stock.

Friend of the site, Jack Hough, also hosts a weekly podcast for Barron’s Magazine that covers the latest in “high finance.”

His interviews with the Visa CEO and Square CFO provide behind-the-scenes access into the fintech ecosystem.

See: Motley Fool Review and Barron’s Magazine Review

PayPal (PYPL) Stock FAQs

Is PayPal stock overvalued?

PayPal stock is definitely an expensive stock — it trades at 13x EV/Revenue and has a 62x P/E ratio.

However, just because a stock is “overvalued” doesn’t mean it won’t continue to rise in price. Note that “overvalued” high-growth tech stocks are negatively impacted by rising interest rates.

Does PayPal pay a dividend?

PayPal does not pay a dividend, which is similar to other technology companies that would rather allocate capital to maintain its growth rate.

PayPal does not pay a dividend because it is more valuable for them to invest cash flow back into the business instead of distributing it to the shareholders.

Is PayPal a good long term stock?

Yes, we believe that PayPal shows potential to be a good long-term stock because it is the largest digital wallet provider in the U.S.

The company had a record year in 2020 and continues to offer new products that add long-term value to the stock, such as crypto trading, QR codes, and even a Venmo Credit Card.

Why should I buy PayPal stock?

Investors buying PayPal stock believe it could become the industry-leading financial technology company.

PayPal had a great 2020 and introduced several new products that generated healthy buzz on Wall Street.

Bottom Line: PayPal Stock

Alongside Square, PayPal appears to be the winner of the growing fintech market. It’s taking on the legacy institutions while staying agile and adding new products at warp speed.

Will the stock cool off in the short-term? Maybe. But PayPal’s long-term potential is too exciting to ignore.

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This article is for informational purposes only. It is not intended to be investment advice.

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and is a recognized expert in investing, cryptocurrency, and financial management. His work has been cited in leading industry publications, such as InvestorsPlace and Business Insider. Sean is interested in the people and companies who are driving financial innovation.