One of the key trends of the past few decades has been the rise of e-commerce. While it has receded from the highs seen during the pandemic, when the closure of most shops meant that nearly 40% of retail sales in the UK were made online, it still accounts for 16% of all sales in the US and more than a quarter in Britain. This has been good news for companies such as Amazon, and bad news for the high street. However, rather than risking money on a particular retailer, it may make sense for traders to buy one of the most important gatekeepers in the world of e-commerce.
The company in question is, of course, PayPal (Nasdaq: PYPL). PayPal is one of the most popular electronic payments platforms, used for everything from retail transactions to services such as Airbnb. It has 426 million active accounts across 200 markets. While this platform still provides the core of PayPal’s revenue, growth has slowed drastically since Covid-19. This is partly due to the general downturn in household spending. However, another factor, and one that seems to have rattled many investors, is intensifying competition from rival services provided by Google and Apple. These services have threatened to entice customers away from PayPal and forced it into defensive price cuts, hurting its margins.
PayPal bounces back – a steep road to recovery?
The good news is that PayPal seems to have found a way out of its problems by broadening its business. The large number of different payment options on the market may be bad news for its main branded payments business (although it is still growing), but it has created an opportunity for its Braintree subsidiary, which serves as a simple single gateway to connect firms with these various payment providers, without having to deal with them individually. At the same time, PayPal is trying to appeal to younger consumers with Venmo, a peer-to-peer transaction service. It is making tweaks to its main product as well, including a new feature aimed at making it quicker and easier to buy products as a guest (without setting up an account with the retailer).
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
These changes seem to be helping PayPal bounce back. Revenue growth is increasing by double-digits again, with the volume of transactions processed rising by 14%. Revenue in 2023 was almost double 2018’s levels, with earnings increasing by a similar amount during the same period. After a few years in which they started to dip, operating margins have rebounded to record levels and the return on capital employed, a key gauge of profitability, has similarly increased to 15%. Despite this continued success, the stock is priced modestly at 14.4 times 2025 earnings.
Note too that while the shares are still more than 75% down from their peaks in 2021, they are now trading above both their 50- and 200-day moving averages. I suggest you go long at the current price of $67 at £50 per $1. Put the stop loss at $48, giving you a total downside of £950.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
How to tap into AI energy stocksOne certainty about generative AI is that it is hugely energy-intensive. Companies providing that power look set to capture the benefits.
-
Will HMRC block money market funds from the stocks and shares ISA allowance?Cautious investors looking for cash-like returns could be prohibited from using money market funds in a stocks and shares ISA under new ISA rules from HMRC. What could it mean for you?
-
Big Short investor Michael Burry closes hedge fund Scion CapitalProfile Michael Burry rightly bet against the US mortgage market before the 2008 crisis. Now he is worried about the AI boom
-
The global defence boom has moved beyond Europe – here’s how to profitOpinion Tom Bailey, head of research for the Future of Defence Indo-Pac ex-China UCITS ETF, picks three defence stocks where he'd put his money
-
Profit from a return to the office with WorkspaceWorkspace is an unloved play on the real estate investment trust sector as demand for flexible office space rises
-
New frontiers: the future of cybersecurity and how to investMatthew Partridge reviews the key trends in the cybersecurity sector and how to profit
-
An “existential crisis” for investment trusts? We’ve heard it all before in the 70sOpinion Those fearing for the future of investment trusts should remember what happened 50 years ago, says Max King
-
8 of the best properties for sale with wildlife pondsThe best properties for sale with wildlife ponds – from a 16th-century house in the Ashdown Forest, to a property on Pembrokeshire’s Preseli Hills
-
Why a copper crunch is loomingMiners are not investing in new copper supply despite rising demand from electrification of the economy, says Cris Sholto Heaton
-
Where to look for Christmas gifts for collectors“Buy now” marketplaces are rich hunting grounds when it comes to buying Christmas gifts for collectors, says Chris Carter
