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Looking for Growth Stocks Amidst Uncertainty? What PayPal Has Going for It

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Investors are mostly in a good mood this week, but that comes in the midst of an overall pause in risk sentiment as coronavirus cases spike, 12 states pause reopenings and cyclical value stocks fall slightly out of favor. Investors are looking for growth stocks wherever they can find attractively priced ones. 

Since June 2, the S&P 500 is down a tick and the Vanguard S&P 500 Value ETF is down 3.7%. Its growth counterpart is up 1.6% in that span. The New York Stock Exchange FANG index, tracking Facebook  (FB) - Get Meta Platforms Inc. Report, Apple  (AAPL) - Get Apple Inc. Report, Amazon  (AMZN) - Get Inc. Report, Netflix  (NFLX) - Get Netflix Inc. Report and Google  (GOOGL) - Get Alphabet Inc. Report, is up about 5% in that span. Two features these stocks have in common: they are all finding new ways to monetize both their core and new business lines and they are all trading at expensive valuations relative to the last year and a half. They also pose regulation risk. 

Enter PayPal  (PYPL) - Get PayPal Holdings Inc. Report

PayPal isn’t exactly trading cheaply, but there’s an argument for the fact that it’s not expensive either. And the company is also in the class of large-cap growth tech stocks that has a pathway for new opportunities, leveraging its existing assets and position of competitive strength. The stock is up 56% year-to-date and, as of June 30, trades at 47 times next 12 month’s earnings per share against its 5-year average of about 30 times but a high of 47 times, according to FactSet data. 

The move into e-commerce, which was already still a growth area pre-COVID, is now accelerated in the stay-at-home environment, lifting PayPal’s projected growth rates. Analyst projections according to FactSet are for a compound annual growth rate of earnings of about 20% for the next several years, not unreasonable compared to the stock’s valuation. And the average analyst price target of $167 implies a target multiple on forward one-year EPS of 46 times. That means, if the multiple holds true, the stock can compound at around 20% a year and if the multiple fades through time, the stock is still a decent grower. 

But maybe the multiple can hold still or even expand with a new business line one analyst is hoping will open up. 

PayPal’s Venmo is barely monetized and if the company is able to turn it into a direct deposit generator, this could be a “game changer,” Canaccord Genuity analyst Joseph Vafi wrote in a note. 

PayPal does not disclose Venmo's revenue, but from the roughly $20 billion in revenue PayPal may see in 2020, Venmo likely contributes roughly $500 million annually right now, Vafi told TheStreet. Vafi also said in his note that segment is likely unprofitable. Vafi wrote that Venmo’s total payment volume has recently run at roughly 50% growth, mostly driven by peer-to-peer transactions. Adding direct deposit could easily make Venmo a player in larger transactions. Not only would total transaction amount increase, but so would the number of users and revenue per user. 

But the way in which PayPal moves Venmo into a direct-deposit type of asset is tricky; employers cannot directly deposit employees’ earnings into Venmo. Money must be placed into a bank account first. Fortunately for PayPal, the company has partnered with Visa’s Plaid, a back-end and unmonetized platform for PayPal’s purposes, which may be able to act as a go-between for users’ bank and Venmo accounts. 

Vafi’s price target on PayPal of $190, coupled with his EPS estimates for the next 12 months implies a forward multiple of roughly 50. 

The point: PayPal is working at ways to monetize its popular Venmo app. Pair that with ongoing growth in core PayPal platforms and you have a company that has a real shot at growing into its current valuation. 

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