Market Mad House

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

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PayPal’s Money Machine Keeps a Humming

PayPal Holdings (NASDAQ: PYPL) has built what might be the most profitable money machine and best value investment in Silicon Valley. The Fintech Company’s ability to generate more and more cash just keeps growing and growing.

PayPal generated an annual gross profit of $6.3 billion during the 12 months that ended on 31 December 2017. That number of was up from $5.141 billion a year earlier and it was just the tip of the iceberg.

The payment-solution provider also generated an operating income of $2.127 billion up from $1.586 billion during the same period, Stockrow data indicates. That compared favorably with a net income of $1.795 billion up from $1.401 billion.

PayPal is Generating a lot of Cash

Even more impressive is PayPal’s ability to generate a vast amount of cash. The company reported a free cash flow of $1.864 billion, a financing cash flow of $4.084 billion and an operating cash flow of $2.531 million on New Year’s Eve 2017.

That gave PayPal a cash and short-term investments number that rivaled its revenues. PayPal reported $13.407 billion in the bank on December 31, 2017, and revenues of $13.084 billion on the same day.

That means PayPal is demonstrating an ability to generate float rivaling those of major banks. What’s more impressive is the ability to grow that float.

PayPal’s revenues grew from $10.842 billion in December 2016 to $13.094 billion a year later. Cash and short-term investments grew from $10.323 billion to $13.407 billion in 12 months. The company’s revenue and float appear to be growing at a rate of around $3 billion a year.

PayPal’s Usage Skyrockets

The size and scope of PayPal’s business is expanding as dramatically as its revenues and cash flow.

The total number of PayPal accounts grew from 197 million in 4th Quarter 2016 to 227 million a year later, Statista data indicates. PayPal added new accounts in every quarter of 2017.

More importantly, the volume of PayPal payments increased by over one billion in 2017, Statista calculated. PayPal reported a payment volume of 1.755 billion in 4th Quarter 2016 and 2.199 billion a year later.

PayPal is not only demonstrating sustained growth but a high-level of sustained growth. The new users are leading to new business and quantifiable organic growth.

Venmo’s Payment Volume increased by 86% in 2017

Nor was it just PayPal itself that was growing, the social media peer to peer (P2P) money transfer app was growing just as quickly.

The volume of Venmo payments increased by 86% during 2017, rising from $6.8 billion in 1st Quarter to $10.4 billion in 4th Quarter, Statisa reported. If those figures are accurate, Venmo’s payment volume increased by $3.6 billion during 2017.

These figures indicate that PayPal might be the most successful payment solution in the world. It might also be creating a Fintech network that will one day rival those of Visa (NYSE: VA) and MasterCard (NYSE: MA).

Is PayPal Leaching off Visa and MasterCard?

Strangely enough, much of PayPal’s growth is being driven by Visa and MasterCard.

Much of PayPal’s popularity is driven by the ability of its users to spend from PayPal accounts through debit or credit cards. Many of the merchant payments through PayPal are made with Visa and MasterCard products.

PayPal recognizes this and has added the ability to make money transfers directly to debit cards to Venmo, The Verge reported. Users should be able to make the transfers in around 30 minutes.

If that was not enough, PayPal was testing a plastic Venmo Visa card just year. The card would allow users to make purchases at cash registers and get cash with a pin number using a Venmo balance, Market Mad House reported.

This will have many people wonder if PayPal’s growth depends upon Visa and MasterCard. It also means that there a lot more room for PayPal growth. There were 732 million Visa cards worldwide and 337 million in the United States in 2nd Quarter 2017, Statista data indicates. There were also 604 million MasterCards in circulation outside the United States in 4th Quarter 2017, Statista reported.

PayPal’s Vast Growth Potential

PayPal is a highly profitable and cash-rich business with vast potential for growth. That makes it a great growth investment and a value investment in Silicon Valley.

My conclusion is that PYPL was undervalued at $77.70 on 22 February 2018. Buy this stock now, because PayPal’s stock price is likely to experience growth rivaling that of its business in the near future.