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Fintech in 2020 is Too Hot to Handle

Tech Letter

I’ve been kicking myself that I missed the boat this year on a stock that I spent last year hyping like no other after I predicted a tsunami of bullish action from fintech players.

I pigeonholed PayPal (PYPL) as one of the rising stars of the fintech industry and they certainly have delivered in spades.

But even I didn’t see this coming.

PayPal has more than doubled since the tech wreck in March and shares are trading north of $200.

A quick double of the stock has more than 20 analysts raising price targets for the stock since earnings came out, and most reiterated conviction buy ratings on the shares.

PayPal’s monetization engines take from both sides of its consumer and merchant platforms.

I expect growth on the top line to speed up and margins to increase if the rapid digitization of payments turns out to be here to stay, which I wholeheartedly believe it will.

PayPal’s business model has leaned on e-commerce payments, but now is the perfect time to invest in so-called frictionless payments, as well as consumer banking.

They hope to roll out QR code functionality in the US.

PayPal recently announced a partnership with CVS Health (CVS) to roll out QR-code payment options in more than 8,200 pharmacy stores in the fourth quarter.

The better-than-expected second-quarter results were solid across the board stemming from net new additions to the client (and merchant) count, TPV growth, Venmo growth, revenue growth, margins, and cash flow.

That is a whole lot of positives to work from!

Now, there is considerable evidence of sustainability of the underlying behavioral changes that are producing the growth.

Management’s decision to raise and increase estimates it had withdrawn demonstrates the company’s confidence.

There is bullish case for an opportunity for a new margin profile for the company longer term.

PayPal is about the shrug off the end of the eBay operating agreement and start harvesting volumes from several of its multi-year investments (Paymentus, MELI, Uber, Facebook, Honey acquisition).

PayPal is well-positioned in a market that could add up to $5 trillion even excluding online bill-payment services, in-store payments, and the Chinese market.

In mid-2020, it is clearly the most atrocious macroeconomic backdrop any of us have seen, with major parts of business travel and events on the back burner, and PayPal is still pulling off miracles by producing record numbers.

I attribute PayPal’s success to a multipronged, diverse platform scaled across the world that allows users to invest in this environment and shape the outcome, rather than sitting back and being a recipient.

The number that sticks out most is the more than 21 million net new active customers across its platform in the June quarter, a bigger number than in some entire years.

The bullish case for PayPal will outlast the health crisis as consumers are now tied to using PayPal during the crisis and will continue to do so long after because the product delivers the security and convenience that others don’t.

The outperformance certainly has something to do with a high level of trust and security that goes with it to boost the legitimacy of the brand and that is especially salient for new joiners.

No doubt that PayPal is hardly the only digital payment option, and competition is fierce, but they are good at what they do.

This is an inflection point in e-commerce and digital payments; the trends were pulled forward by two or three years, but the most fundamental difference right now is the new and expanded addressable market in the offline world.

The market has increased exponentially, in a world where digital payments are a major slice of all payments, PayPal is fully expected to continue to outperform.

There is the case that shares are too far out over its skis in the short-term, but for good reason.

I would put this stock on the high alert list ready to put new money to work in shares as soon as there is a medium-sized pullback.

Paypal

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