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The Worst Mistake PayPal Investors Can Make Right Now

High-growth tech stocks have been getting hammered in recent months, thanks to heightened economic uncertainty caused by soaring inflation, the ongoing coronavirus pandemic, and tightening monetary policy. Among this unfortunate group is fintech leader PayPal Holdings (NASDAQ: PYPL), whose stock is down roughly 41% over the past six months. At recent prices, the business sported a market cap of $205 billion.

While it's easy to take your signal from the rest of the market, you're always better off ignoring the noise and thinking independently. Using this perspective, the worst mistake PayPal shareholders can make right now is to panic and sell their stock.

Let's find out why.

Image source: Getty Images.

PayPal is a winning investment

Since spinning off from eBay in July 2015, PayPal's stock has returned nearly 400%, crushing the broader S&P 500. The company has been a winning investment because of its impressive fundamentals. From 2015 through 2020, annual sales more than doubled from $9.2 billion to $21.5 billion. During this time, net income and operating cash flow jumped 242% and 130%, respectively.

Pioneering the growth of electronic payments has certainly been lucrative for PayPal. And the rise of online shopping has helped propel this trend. Total payment volume (TPV), a key metric to pay attention to, was a whopping $310 billion in the most recent quarter (third-quarter 2021 ended Sept. 30), up 26% year over year. What's more, PayPal added 13.3 million net new active accounts during the three-month period. The company is clearly still operating at a high level, which you wouldn't know by looking at the stock price.

This year, management expects revenue to jump roughly 18% compared to 2021 to reach $30 billion. While this was below Wall Street's expectation of $31.6 billion, it would nonetheless be a solid year-over-year gain and in line with PayPal's past yearly growth. There's also a high probability that TPV will approach $1.5 trillion for all of 2022, a truly gargantuan amount.

For this remarkable historical performance, and for the potential of continued success, investors are being asked to pay just 42 times trailing-12-month earnings. This is near the lowest level PayPal's stock has traded at in the past few years. Investors who decide to cash out of PayPal now because of its poor recent price performance are likely missing out on continued market-beating returns in the future. Now might actually be a great time to buy PayPal shares.

PayPal has a massive user base

Perhaps nothing exemplifies PayPal's dominance in the world of digital payments more than its burgeoning customer base. Through the end of the third quarter on Sept. 30, the business had 416 million active accounts, a figure that climbs higher with each passing quarter. PayPal checkout is currently available at 75% of the top 1,500 North American and European retailers. This ubiquity is unmatched.

Introducing new product features is vital to attract more individuals to PayPal's platform. The company revamped its flagship mobile app last year, adding early direct deposit and shopping rewards to existing capabilities like investing in and checking out with crypto and buy now, pay later (BNPL). "Those customers that are using our installment paid product, our buy now pay later product, have a 21% increase in engagement, relative to other customers," CFO John Rainey said on the Q3 earnings call.

Boosting PayPal's prospects is a new partnership with Amazon, which will allow U.S. customers to check out with their Venmo balances starting sometime this year. It is the first third-party payments partnership Amazon has entered into, demonstrating just how powerful a brand PayPal really is.

This massive user base allows PayPal to benefit from a network effect: As more individuals sign up for a PayPal account, the value for merchants rises, as they now have a bigger potential customer base; and the opposite is also true, with more participating merchants growing the number of places consumers can shop. This only strengthens PayPal's competitive position over time.

I expect 2022 to be a positive year for PayPal's stock, primarily as a result of the unwarranted pessimism priced in today. If you're a shareholder, I urge you to hold onto your shares. The potential for market outperformance is still very much alive.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns and recommends Amazon and PayPal Holdings. The Motley Fool recommends eBay and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $75 calls on PayPal Holdings, short January 2022 $1,940 calls on Amazon, and short January 2022 $82.50 calls on eBay. The Motley Fool has a disclosure policy.


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