In the last 12 months, PayPal’s (NASDAQ:PYPL) performance has been disappointing. During this period, PYPL stock has declined by around 19%.
On the valuation front, though, things look attractive now. Recently, BMO Capital analyst James Fotheringham upgraded PYPL stock to “outperform” with a price target of $224.
At the same time, if we broaden the time horizon, PYPL stock has been a value creator. In the last five years, the stock has delivered returns of 357%. As such, I strongly believe the uptrend can sustain over the next five years. Sure, there will be phases of price or time correction. But PayPal should deliver robust returns for long-term investors.
PYPL Stock: Financial Flexibility for Acquisitions
One reason to believe that PayPal will continue to deliver healthy growth is the balance sheet. As of the third quarter of 2021, the company reported cash, equivalents and investments of around $20 billion. Further, for 2021, the company has guided for free cash flow (FCF) of about $5 billion.
It’s very likely that PayPal will pursue aggressive inorganic growth. In September 2021, the company acquired Paidy for a consideration of $2.7 billion. This acquisition has boosted the company’s presence in Japan. CEO Dan Schulman is also looking at further partnerships and acquisitions to expand in Japan.
A similar strategy in other big markets will help PayPal boost market share. Back in June 2020, PayPal and Meta Platforms (NASDAQ:FB) invested in an Indonesia-based ride-hailing services company called Gojek. That company provides online food delivery payment services. Further acquisitions are likely in Southeast Asia as well, another big market.
Finally, it’s worth noting that PayPal checkout is available across 75% of the top 1,500 North American and European retailers. This company’s business model is scalable on a global basis. What’s more, PayPal has the financial flexibility to pursue organic and inorganic growth.
PayPal believes that its total addressable market is worth $110 trillion. With rising digital payments, the company has multi-year tailwinds. I would there not be surprised if it achieves its revenue target of $50 billion by 2025. It goes without saying that this will be associated with strong upside in free cash flows.
Expanding Crypto Presence
Investors have even more to be excited about with PYPL stock, too. Specifically, PayPal enabled the buying, selling and holding of cryptocurrency on its platform in the United States not too long ago, back in October 2020.
To start, accepted cryptocurrencies have been limited to Bitcoin (CCC:BTC-USD), Bitcoin Cash (CCC:BCH-USD), Ethereum (CCC:ETH-USD) and Litecoin (CCC:LTC-USD). In August 2021, though, PayPal also expanded its crypto offering into the United Kingdom.
There are several points worth noting here, from a growth perspective. For one, it’s very likely that PayPal will continue to expand its crypto offering to other countries. At the same time, more crypto options will be possible in the coming years.
With wider cryptocurrency adoption, the company will see substantial active user growth. Furthermore, companies are increasingly looking at crypto as a payment option for online shopping. This will benefit PayPal in the long term, as transactions increase using both traditional currency as well as crypto payments.
In July 2021, CEO Dan Schulman suggested that smart contracts and DeFi apps are part of the company’s long-term crypto plans. This will likely be another avenue for active user growth over the next decade.
Final Views on PYPL Stock
No doubt, PayPal has ambitious growth plans through 2025. The company has a big addressable market and ample financial resources to capture a bigger market share.
With organic and inorganic growth, cash flows are likely to accelerate and boost valuations. Just to put things into perspective, PayPal reported revenue of $6.18 billion for Q3 2021 alone.
This implies an annual revenue potential of $25 billion. For 2021, the company expects FCF of more than $5 billion. With revenue guidance for $50 billion by 2025, annual FCF will likely be in excess of $10 billion.
As such, PYPL stock looks attractive after the recent correction. I believe that the stock will likely resume its long-term uptrend in 2022.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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