About five months ago, I wrote about PayPal's (PYPL - Get Report)  reasonable valuation in the context of long-term growth plans to offset its declining legacy business.

Since then, the stock price has increased by more than 25%, closing at an all-time high of $120.65 on Thursday. Yet PayPal reported Q1 results that were only in-line with expectations and its operating agreement with eBay (EBAY - Get Report) comes to an end in just one year. Nonetheless, the market seems to appreciate the company's recent developments to sustain its long-term growth.

PayPal Keeps on Expanding Its Footprint

In Q1, eBay marketplaces volume declined 4% and now represents only 9.7% of PayPal's Total Processing Volume (TPV). Considering the growth of other PayPal's activities and the decline of its business with eBay, management expects the TPV from eBay to drop below 5% by the end of 2020. Thus, the impact of the end of the operating agreement with eBay will be limited. 

But PayPal has been expanding its footprint way beyond its legacy platform business anyway. The goal is to transition from a payment processor for eBay to a digital payment platform offering a broad range of services. The company has a history of building partnerships instead of trying to compete with well-established businesses in the payment industry.

For instance, last year, PayPal expanded its partnership with American Express  (AXP - Get Report) to propose PayPal transactions via the American Express mobile app. More recently, PayPal and Visa (V - Get Report) developed an instant transfer solution for Canadian customers.

The company has been growing via acquisitions, too. Over the last few years, PayPal spent several billion dollars to acquire iZeetle, Hyperwallet, Xoom, etc. Also, last year, CEO Dan Schulman said he expects PayPal to spend $3 billion a year on M&A.

This multi-billion dollar inorganic growth is a capital-intensive business, though. But considering revenue and user growth, the strategy has paid off so far. The company is gaining market share in growing areas. For instance, revenue from person-to-person transfers grew 41% during Q1, representing 26% of PayPal's TPV. In contrast, Western Union (WU - Get Report) is struggling with flattish revenue despite its initiatives in the digital payments area.

New Growth Options

But PayPal isn't stopping there. It's also using new strategies to expand its footprint. The company now puts money into leading marketplaces. After a $500 million investment in Uber  (UBER) , PayPal announced a $750 million investment in MercadoLibre  (MELI - Get Report) , the Latin American marketplace, several months ago. Of course, the goal isn't short-term speculation. The corresponding quarterly unrealized gains/losses will be irrelevant. Instead, the company wants to build solid partnerships with the leading marketplaces to grow its TPV over the long term.

Besides these equity investments, PayPal is also getting into the cryptocurrency market. A few months ago, the company made its first blockchain investment.

And the participation in Facebook's (FB - Get Report) Libra consortium is interesting. The new blockchain-based currency has the potential to reach global scale and compete with PayPal's businesses. Yet, PayPal decided to invest in the consortium, as the deal reinforces ties between Facebook and PayPal as both companies had announced an agreement related to payments on Instagram. But it's also a long-term option to stay relevant in the future of digital payments.

No Margin of Safety

Taken separately, these individual investments don't have a significant impact on PayPal's balance sheet. But the company needs all these initiatives to grow as a leading digital payment platform over time. And scale matters. Not only does the company have to adapt to technological changes, but its solutions must also stay relevant to customers.

And considering the competitive landscape and the regulatory environment, the past successes aren't guaranteed to repeat themselves. Also, PayPal will face extra challenges in the short term as COO Bill Ready, will leave the company by the end of the year.

At its current share price, PayPal's non-GAAP PE ratio is roughly 40x, based on the midpoint of its 2019 expected non-GAAP EPS of $2.975. This type of valuation implies solid growth over the next several years. But considering the risks and the required investments, the market valuation doesn't provide any margin of safety.

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The author doesn't own any of the stocks discussed.