PayPal, Payments, and Profits

10/07/2015 7:00 am EST

Focus: STOCKS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Our latest recommendation is a familiar name for users of the Internet’s leading payment system, observes Nicholas Vardy, editor of The Alpha Investor Letter.

PayPal (PYPL) allows buyers and sellers to make or receive payments from their computers, smartphones, or mobile devices on PayPal’s systems. And they can be reasonably assured of a secure transaction.

PayPal recently crept back into the headlines when, after spending 13 years under the ownership of eBay (EBAY), PayPal once again became its own company after it was spun-off in July.

At the end of the second quarter, PayPal had 169 million users, a solid 11% increase compared to last year. PayPal is now accepted by over 70 of the top 100 US retailers.

The number of payments rose by 27% to 1.08 billion transactions. Total payment volumes increased by 20% to nearly $66 billion.

Free of the shackles of eBay, PayPal today is an independent payment platform, which can now partner with previously off-limits vendors like Amazon.com (AMZN) and Alibaba (BABA).

The next challenge for PayPal is the successful adoption of mobile payments and the offline merchant business.

Specifically, PayPal wants to expand into the $25 trillion payment market, where today it holds only about a 1% market share.

Smartphone enabled services at the point of sale in stores, restaurants, and gas stations offer particularly good opportunities.

In preparation for PayPal’s listing in July, eBay acquired an impressive collection of four companies with various mobile payment capabilities.

These businesses include Braintree, an online-payment gateway; Xoom, which runs overseas remittances; Paydiant, an online storefront for retailers, including Apple; and Venmo, an email social network aimed at Millennials.

The combination of these four companies gives PayPal depth and scale to immediately move into several new markets and establish itself in the big leagues of the cashless payment world.

Most spin-offs are saddled with debt by the parent company before they are set out to pasture. But this is not the case with PayPal.

Like a wealthy parent giving his kid a huge trust fund to start off his independent life, eBay has provided PayPal with a $6.6 billion pile of cash.

The earnings outlook for PayPal remains steady and strong. PayPal is expected to earn $1.8 billion, or $1.49 a share, in 2016 on revenue of $10.8 billion.

That’s a solid gain from an expected $1.48 billion in 2015 earnings, or $1.25 a share, on revenue of $9.2 billion. Buy PayPal at market today and place your stop at $23.00.

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