PayPal Holdings (NASDAQ: PYPL) might be the best value in financial stocks because of its capacity for growth. The digital wallet provider’s growth in the year since its stock returned to the market has been phenomenal.
Since June 2015 PayPal has added $1.408 billion in revenue, $276 million in net income, $3.72 billion in assets, $413 million in cash from operations and $549 million in cash and short-term investments. Revenues grew from $8.602 billion in June 2015, to $10.01 billion in June 2016, data provided by ycharts indicates. Assets grew from $26.91 billion in June 2016, to $30.63 billion a year later.
Cash and short-term investments grew from $4.408 billion in June 2015 to $4.957 billion in second quarter, 2016. Cash from operations grew from $2.401 billion in summer 2015 to $2.814 billion in June 2016. The net income increased from $1.08 billion on June 30, 2016 to $1.356 billion in June 2016.
PayPal is a Value Investment
These figures prove that PayPal is a value investment because its business model generates a lot of float. More importantly that float appears to be growing, which is what I look for in a financial stock.
The only number that fell at PayPal was cash from financing; which fell by $2.2 billion. PayPal reported $2.964 billion in cash from financing in June 2015, and $764 million in cash from financing a year later. That calls its foray into lending in question, but does not threaten its long-term growth prospects.
PayPal proves that digital wallets can be immensely profitable; the company reported a quarterly profit margin 12.19% on June 30, 2016. Its major problem is that everybody else in town seems to have noticed that profit.
Growing Competition Threatens PayPal’s Future
That calls PayPal’s future into question because of growing levels of competition from larger, better capitalized and more prominent companies. Apple (NASDAQ: AAPL), Alphabet (NASDAQ: GOOG), MasterCard (NYSE: MA), JPMorgan Chase (NYSE: JPM), Amazon (NASDAQ: AMZN) and even Samsung are all rolling out digital wallets.
Interestingly enough the biggest threats to PayPal among these solutions; will be Chase Pay and Walmart Pay. Apple Pay is not a direct threat to PayPal, because it is a niche product that major retailers are refusing to use. That might change this fall; if reports Apple is planning to offer online payment via Apple Pay for the holiday season are true.
Walmart Pay; which can be integrated into apps or used directly at registers, has been rolled out at 4,600 US stores. It’s a direct threat to PayPal; because Walmart Pay can be used at America’s most popular retailer, or Walmart.com.
A potential selling point for Walmart Pay; would be the ability to deposit cash or checks directly to their digital wallet, through the Walmart Money Centers. Another would be the capacity to purchase money orders; or transfer funds, through the centers with Walmart Pay. Another powerful option would be the capability to withdraw cash from a digital wallet at Walmart Money Centers, or cash registers.
Walmart Pay would become an even greater threat to PayPal if other retailers start accepting it. So far there’s no sign of this but with the collapse of Walmart Pay; a solution offered by a consortium of big retailers including Target and Walmart, it is possible.
Finally Walmart Pay might convince other retail giants; like Kroger (NYSE: KR) and Target (NYSE: TGT); to offer their own payment apps. One potential opportunity here for PayPal; would be to try and become Target or Kroger’s official digital wallet. Another opportunity would be to join forces with Walmart; and have Walmart Pay support PayPal and vice versa.
How Chase Pay Threatens PayPal
Chase Pay has the potential of becoming a greater threat because it is offered directly by a bank. Chase has strong working relationships with a large number of retailers; and its own stable of credit card brands. An even greater advantage Chase Pay has is the bank’s network of ATMS which can be used to get cash. Cash is still used in 40% of the transactions in the United States.
A Chase Pay that can be used to get cash from ATMs is a huge threat, because it offers a convenience PayPal lacks. Currently the only way to get cash with PayPal; is to sign up for one of the company’s debit cards, or transfer the money to a bank account. Chase has announced plans to integrate Chase Pay with its ATM network, USA Today reported.
Another advantage ATMS would give Chase is the ability to deposit checks; or cash, directly to a digital wallet via an ATM. Some Chase ATMs have had the capability to scan checks for years. USA Today reported the bank wants to bring that capability to Chase Pay as well.
The success of Chase Pay would prompt other banks to begin offering similar digital wallets. That would present PayPal with a major dilemma because they would offer a host of services it cannot. A potential solution here would be to offer an Apple Pay type app that gives access to both bank accounts and PayPal.
Integrating Chase Pay and PayPal would be a smart move for both companies. It would give Chase customers access to a proven digital wallet solution, and offer PayPal users the capability to deposit checks or cash to a digital wallet. PayPal users would also get an incentive to start banking at JPMorgan Chase.
The Blockchain Threat and Opportunity
iPayYou and StartChat are especially problematic because they allow users to send bitcoin via the popular messaging apps Twitter and Telegram. This poses a direct challenge to PayPal’s Venmo. which allows instant transfer of funds via a messenger app. Plutus is a British digital wallet that would let customers pay online; or via brick and mortar stores, via bitcoin.
These solutions are a potential threat to PayPal because it will have to make costly upgrades to bitcoin to its ecosystem if they are successful. They are also an opportunity; because PayPal’s Braintree subsidiary has a bitcoin wallet solution – that could be integrated into PayPal’s popular digital wallet at some point.
The future looks bright for both PayPal; and digital payment, but the industry is about to be completely disrupted. This gives PayPal some excellent prospects for future growth because of its existing expertise, despite all the threats.
The bottom line is that PayPal is a bargain at the $37.42; it was trading for on July 22, 2016. This company has the potential to become the industry leader; and a payments platform that might rival Visa, if it plays its cards right. If you are planning to buy and hold one financial stock; it should be PayPal, because of its growth potential.