It is time to address the elephant in the room:
Many tech companies have a valuation problem.
PayPal builds software platforms to move money. It also has a market cap of $112 billion. That’s substantially more than American Express at $91 billion and Goldman Sachs at $73 billion.
PayPal CEO Dan Schulman participates in the Yahoo Finance All Markets Summit: A World of Change at The TimesCenter on Thursday, Sept. 20, 2018, in New York. (Photo by Evan Agostini/Invision/AP)Evan Agostini/Invision/AP
For many, this is a sign that tech is overpriced. That may be true for some stocks in this sector. But don’t be quick to use valuation to write off PayPal. Let me explain …
It used to be that investors were willing to pay up for growth, or even a big idea. In the 1990s, Dell Computer zoomed higher because investors believed its mail-order business model was the future.
For a long while, it was. But when the internet and the cloud replaced the PC buzz, Amazon.com and Salesforce were supposed to change the face of business.
And they did.
Sometimes, investors get the big picture right. Paying up to participate is not a terrible idea.
PayPal is sitting on a really big idea.
When the company added iZettle back in May 2018, it was the final piece of a suite of digital platforms. The Swedish mobile payments company is in 12 European markets with credit-card readers, point-of-sale systems and software tools. Customers can build secure webshops, process payments, determine logistics and perform sales analytics.
It is all part of a larger process to merge the physical and digital worlds. Preferably with all transactions flowing through a PayPal gatekeeper.
In 2018, PayPal acquired Fraud Services and Bill Me Later. The fraud-detection services dovetailed nicely with Zong, the micropayments company it acquired in 2011. It allowed customers to transact tiny payments even if the participants did not have credit cards. And there have been investments in Braintree, Venmo and Xoom, to bulk up merchant and peer-to-peer payments.
In 2015, the digital payments company acquired Modest, a customer experience company. Swift Financial was folded into the platform to provide small-business lending in 2017.
Visa Inc., a PayPal strategic partner, forecasts that the digital portion of total global spend, now $17 trillion, will rise from 9% in 2017 to 15% by 2020. That would be an annual compound growth rate of 20%.
Financial technology skeptics argue companies like PayPal are reinventing the wheel. For all the talk about a cashless society, the U.S. Federal Reserve reports the demand for physical cash is still growing.
Since 2008, U.S. dollars in circulation have ballooned by 77%. The metric grew by 7.4% to $1,571 billion in 2017. For perspective, that is 204 greenbacks for every person on the planet.
And while the managers at PayPal have great plans for the future, for now all of their platforms still depend on a physical bank account regulated under the Federal Deposit Insurance Corp.
A bet on PayPal stock now is a wager the company can build an end-to-end solution of what Dan Schulman, chief operating officer, calls an operating system for digital commerce.
In that race, PayPal has the inside track.
It has partnerships with Visa, Mastercard, Apple, Alphabet, Samsung, Citibank and a lot of other larger companies that would otherwise be foes. PayPal also has $10.5 billion in cash sitting on its books.
At 31x forward earnings and 7x sales, the stock is hardly cheap. Then again, the best big, longer-term ideas rarely are.
PayPal is a stock to buy into the next stock market crisis.