Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

PayPal keeps growing like Crazy

PayPal Holdings (NASDAQ: PYPL) is demonstrating that its growth is no fluke. Instead the streak of revenue, cash and income expansion is continuing and shows no signs of stopping.

The most impressive figures in PayPal’s latest earnings report are those concerning cash. Cash from operations grew to $3.158 billion during fourth quarter 2016; rising from $2.963 billion in September 2016, and $2.22 billion in December 2014. Among other things that means PayPal’s cash from operations has grown by $757 million since it went public in July 2015. The company reported $2.401 billion in cash from operations in June 2015, just before it left eBay (NASDAQ: EBAY).

An equally attractive figure at PayPal is the cash from financing which grew to $2.038 billion on December 31, 2016. That number was down from $3.079 billion in but growth in fourth quarter 2016 was impressive. In September PayPal reported -$250 million in cash from financing. That means PayPal added $2.288 billion in cash from financing in just three months.

A final commendable figure is cash and short-term investments which fell to $4.975 billion from $15.85 billion in September. That indicates PayPal can maintain a lot of float while significantly reducing the cash in its bank account. In my humble opinion this makes PayPal a value investment because it maintains a lot of cash and float.

NEW YORK, NY – JULY 20: PayPal President and CEO Dan Schulman speaks before ringing the bell at Nasdaq this morning on July 20, 2015 in New York City.  (Photo by Spencer Platt/Getty Images)

PayPal the Growth Continues

Beyond the float, PayPal’s overall revenues have been expanding dramatically. That indicates its business is growing, but more importantly generating a lot of cash along the way.

PayPal added $1.592 billion in revenues over the course of 2016, and $1.878 billion in revenue since it went public. For the record PayPal reported $8.602 billion in revenues in June 2015, $9.248 billion in December 2015, $10.01 billion in June 2015 and $10.84 billion in December 2016.

PayPal does not Need Amazon

Those revenue figures demonstrate that PayPal is capable of sustained organic growth. They also show us that its business is capable of long term growth. What’s more impressive is that revenue growth is occurring without Amazon’s (NASDAQ: AMZN) help.

Most people know that you cannot use PayPal on Amazon, but Dan Schulman has been trying to change that. The PayPal CEO told Bloomberg Technology he is in conversations with Amazon but would not reveal details.

It is hard to tell if Schuman’s statement is for real or wishful thinking because Amazon refused to comment. Still, it is hard to imagine Schuman discussing Amazon unless he thinks he can deliver.

More importantly Schuman revealed that PayPal’s platform has nearly 200 million members. That means it may not need Amazon after all, being on the Everything Store would simply be icing on the cake for PayPal.

Interestingly enough, it might indicate that Amazon needs PayPal. Bloomberg Technology speculated that some European users would only shop there if PayPal were available. If this is true, PayPal is far more valuable than we imagined because the biggest name in ecommerce cannot live without it.

PayPal delivers the Profits and the Income

Beyond the revenue growth and cash, PayPal delivered impressive profits and revenue growth during the fourth quarter. On December 31, it reported a profit margin of 13.08% according to ycharts.

That translated into a net income of $1.401 billion on the same day. This number was only the latest example of steady income growth since June 2015. PayPal reported a net income of $1.08 billion in June 2015. That means its income has grown by $321 million since it became independent again.

This and the free cash flow of $771 million prove that PayPal is making a lot of money from its digital wallets. Its future looks very bright and PayPal is also a very good investment.

PayPal as an Investment

Most observers know that PayPal is not yet paying a dividend yet it is rewarding shareholders. Persons who held PYPL were rewarded with a return on equity of 10% on December 31, 2016.

This and the low price; $39.58 on February 2, 2017, make PayPal a really great investment in my view. I think PayPal is a great long-term investment because it has demonstrated the potential to become a major financial company someday.

The existing platform has demonstrated explosive growth and some of its products such as Venmo and Coinbase have vast growth potential. One huge potential area for PayPal is bitcoin which can be accessed via Coinbase. Bitcoin has become a popular hedging mechanism in some countries such as China and an accepted ecommerce payment solution in nations such as Venezuela.

All this gives PayPal the potential to become of the world’s leading payment and fintech platforms and it only costs around $40 a share. That is definitely a value investment with a lot of long term growth potential.