While the equities of many of the losers of the COVID era such as cruise lines, oil, hotels, airlines, and commercial real estate REITs have surged early this week on Pfizer’s announcement of a COVID vaccine with a 90% effective rate, many of the ‘work from home’ or ‘stay at home’ winners of the year sank on the news.
Obviously, the vaccine is good news for the likes of Carnival (NYSE:CCL) and Delta Air Lines (NYSE:DAL), and hopefully for planet Earth as a whole. Some of this year’s high-flying Nasdaq names were probably overdue for a breather, but some of the downward moves in some of the vaccine ‘losers’ seem unwarranted and if anything, present a rare buying opportunity.
While the vaccine has obviously had a massive impact on the markets in terms of rotations and positioning, it’s not like investors didn’t know one was coming eventually, so I’m somewhat surprised by the magnitude of several of these moves. In many cases, a crisis simply accelerates the inevitable – mall-based retail was already in trouble before the pandemic, and things like digital payments were already coming into the forefront long before the pandemic. These trends were propelled faster by the pandemic but ultimately are much too powerful to need the pandemic to continue ascending over the long term. One such name that stands out to me as a buying opportunity as a result of the pullback, even as the Nasdaq has bounced back somewhat since I began writing this article, is PayPal Holdings (PYPL).
(Image Source: PayPal.com)
PayPal shares have unsurprisingly surged this year, up roughly 70% YTD and more than doubling since their March lows. However, after Pfizer’s news, shares of PayPal have shed about 9% of their value, sinking to under $185 at time of writing. Interestingly, this follows another recent pullback and sharp rebound following its last earnings call, when PayPal slumped from around $191 a share the day before earnings to $179 a share the day after the call. The weakness was short-lived as two days later, shares were back above $200. I believe it’s feasible we should see another similar rebound, and more, once this current rotation subsides.
While coronavirus was perhaps a catalyst for some of the share price appreciation this year, digital payments represent a secular trend that is here to stay for the long term and a COVID vaccine is not going to put a damper on their widespread-adoption. In a recent report entitled Payments, Processors and FinTech: If Software is Eating the World… Payments is Taking a Bite, Credit Suisse analysts make the point that “Global payments volume (~$240 trillion) is bigger than global GDP (~$85 trillion) because multiple payments are made for the same level of output and production.” This is a massive market with room for many winners and the ecosystem that PayPal has successfully built out make it a market leader and one of the most important financial companies in the world.
On the Q3 earnings call, the company reported total payment volume of $247 billion on the platform for the quarter (versus a $232.26 billion consensus estimate), which would represent an annual run rate of nearly a trillion dollars. Total payment volume on the platform is expected to grow by 30% for FY 2020. Any time a company enters the lexicon as a verb, it means that the company has attained ubiquity and become entrenched in our collective daily lives. You want to own these companies. PayPal has achieved this twice, with both PayPal and Venmo – i.e. ‘I’ll PayPal you’, or ‘Just Venmo me’.
While I think PayPal will do well in the short term, and there are interesting near-term developments and catalysts like the new Venmo credit card that will debut in Q1 of 2021 and an upcoming Investor Day in February 2021, further out, investors could be rewarded even more with developments like PayPal wading into the cryptocurrency landscape. For the purposes of this article, I took the opportunity to speak with Steve Gregory, an authority with years of experience in the cryptocurrency space and currently an officer at a regulated crypto exchange to better understand this development and he explained to me that this could be impactful for PayPal and not just a tangential move as it will help PayPal/Venmo better compete with Square (NYSE:SQ), whose Cash App is currently experiencing a high degree of success in the cryptocurrency realm. Steve also praised Venmo’s interface, stating that “Everyone is already familiar with Venmo’s user experience so it is easy to layer on Crypto and make everyone feel comfortable.” Whether you’re a hodler or a crypto skeptic, I think we can all agree that at the very least this foray gives PayPal some nice optionality.
Clearly, the company has been tremendously successful already, but the growth story could just be getting started – think about things like Venmo becoming a “payment option at checkout, both online and offline” at “some of the world’s largest retailers and marketplaces” as “QR codes are integrated into physical retail,” as CEO Dan Schulman discussed on the earnings call. As my fellow Seeking Alpha contributor Librarian Capital outlined in his excellent take on PayPal’s earnings, “The QR code roll-out has continued, as PayPal moves into physical retail. So far it has signed 10 retailers (including CVS (CVS) and Nike (NKE)), and 20 channel partners and point of sale providers (including VeriFone). The signed deals would enable PayPal’s capabilities at ‘millions’ of locations, and the company expects to have 500k small and micro merchants with QR capabilities by the end of 2020.”
Or consider further out, something that would have seemed inconceivable in the not too distant past but that now seems at least feasible, the possibility of “central banks around the world… seriously exploring or even trialing forms of retail digital currencies that they issue directly…” While PayPal has already been a disruptive company, these avenues represent even more potentially game-changing opportunities in the future.
For those who believe that PayPal is just benefiting from the ‘work from home’ economy and will have trouble matching these results as things ‘go back to normal’, consider the fact that they put up record numbers in a quarter where travel and events spending were down sharply – CFO John Rainey pointed out that “We delivered these outstanding results against the backdrop of… continued weakness in the travel and events verticals… which represented slightly more than 10% our TPV last year…” and noted that these segments were down 40% year over year. Clearly, there is no reason that PayPal should be a ‘loser’ in the ‘normal’ economy, as they will benefit from an increase in travel and event spending just like some of the ‘winners’ we have seen this week. The aforementioned QR code rollout could more than offset any perceived loss of volume based on a short-term rebound in physical shopping at the expense of ecommerce.
Like any investment, there are obviously risks facing PayPal that could slow down the bull thesis. If anything, the digital payment world is getting so much positive attention that new or increased competition coming in from both established financial giants and emerging innovative fintech players could take market share from PayPal. However, given the massive size of this market, PayPal’s and Venmo’s ubiquity, and its entrenched position as a market leader, there should be room for many winners with PayPal continuing to be at the forefront.
A wide-scale, long-term global recession that curtails global spending would also hurt PayPal because total payment volume would decrease. Lastly, some would say that the upcoming loss of the exclusive business with eBay (NASDAQ:EBAY) could present a headwind but I am not overly concerned about this as decoupling from eBay probably isn’t the worst thing in the world as it’s not exactly a platform that has been lighting the world on fire in recent times. If anything, this could be worse for eBay than it is for PayPal.
Given the short-term pullback and the transformational long-term opportunities ahead, I believe this sub-$190 price point could be a nice range to buy PayPal in.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PYPL over the next 72 hours. 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: This is purely an academic exercise for our internal use and you should NOT invest based on this note. Investing in any equity involves risk. Potential investors should use this article as a starting point for their own research and due diligence. Before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. I am not a registered financial advisor or investment professional. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. This article is for general information purposes only, and should not be relied upon as a formal investment recommendation.