Pros and Cons to Buying PayPal Holdings Inc (PYPL) Stock

PayPal Holdings Inc (NYSE: PYPL) is a company in transition.

CEO Dan Schulman, a former executive at Priceline Group and Sprint Corp. ( S), wants to steer PayPal from its "push a button, make a payment" model to offer a wider array of digital financial tools -- a shift that has yet to take hold among the online consumer financial populace.

In addition, the San Jose, California-based company recently underwhelmed on the earnings estimates front, and its move to expand its PayPal Venmo offering into a direct merchant payment tool has slowed transaction rates.

The good news? PayPal has extended its lucrative partnership with eBay ( EBAY) until 2023, and total payment volume is on the upswing with active customer accounts rising to 227 million, the company reports.

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The company is pegging its future on the global rise in digital financial transactions, and it's bullish on that front. "The entire financial system's ecosystem is moving, more rapidly than ever before, away from cash and toward digital payments because of the explosion of mobile phones," Schulman says.

PYPL stock at a glance. PayPal is currently trading above $73 per share, against a one-year analyst target estimate of $85. The stock is up 50 percent in the last 12 months but fell by 0.5 percent so far in 2018, dipping nearly 2 percent after Bernstein initiated coverage with a "market perform" rating, citing "underappreciated business pressures surfacing for the leading online checkout button."

Analysts have long maintained that PayPal has relied too much on eBay for revenue, and noted that PYPL likely wouldn't be in play as Amazon.com's ( AMZN) payments provider. Still, Wall Street watchers seem to approve of the overall e-commerce payment landscape, where PayPal is well positioned.

Pros of investing in PYPL stock. One area for growth for PayPal is overseas, where it's planting its flag in several key countries, with China a particular success story.

"China has taken a strong lead in mobile purchases and has been coined the first mobile-centric nation," says Sarah M. Place, president and CEO of Place Trade Financial. "Mobile payments are so widespread that Chinese consumers are regularly paying for their veggies with WeChat at their local farmers' market where cash has traditionally been king."

PayPal already has a partnership with Baidu ( BIDU), China's biggest internet search engine provider. It also has a deal with Alibaba Group Holding ( BABA) to enable PYPL's overseas customers to buy goods and services from Chinese companies, with PayPal handling the transactions.

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Another plus -- younger millennials can also be counted on to support PayPal, buying the company as it plans to broaden its offerings and branch out overseas. "PayPal's peer-to-peer platform, Venmo, is increasingly popular amongst the younger generations, and that gives the company a good reason to be bullish," says Matthew Murawski, a financial planner at Goodstein Wealth Management in Encino, California.

Another factor affecting PayPal stock is the health of the overall stock market with President Donald Trump's trade tariffs weighing on a number of industries. "But PayPal, being a digital operation, is one of the few stocks that should be fairly immune to these developments, so it's a good choice for diversification purposes as well," says Joe Marwood, a stock market trader and author.

Finally, PayPal is also positioned in the financial payments sector and isn't likely to be wedged out any time soon. "Of the top holdings in consumer finance and credit services stocks among U.S. large-cap managers, PayPal is No. 3 behind Visa ( V) at No. 1 and MasterCard ( MA) at No. 2," says Mark Scott, an analyst at eVestment in New York. "PayPal is ahead of American Express ( AXP) and Discover ( DFS), as well."

Cons of investing in PYPL stock. PayPal is somewhat a victim of its own success. The company got in early on digital payments and made hay while the competition played catch-up. Now, the competition is making great strides and threatens to dethrone PayPal as "king of the hill" on e-commerce payments.

Zelle, in particular, is a looming presence in digital payments. "Through the recent (September 2017) launch of Zelle, nearly 60 financial institutions are now offering the free rapid payment processing app for their clients," Place says.

Some of the largest banks, including JP Morgan Chase & Co. ( JPM), Wells Fargo & Co. ( WFC) and more, have begun integrating Zelle within their own mobile apps, Place notes, and that's a problem for PayPal.

"Given that more than half of Americans already have at least one bank app on their smartphones, PayPal could potentially come under pressure simply because the shortest distance for money to travel from a bank account to a friend, or to process a payment, etc. for free, is through their bank, and that's where Zelle excels," Place says.

The bottom line. PayPal stock has been trading in a range between $70 and $86 since the end of last year. "Right now, the stock is trading toward the bottom of this range, just below $75," Marwood says. "This level gives investors a good risk and reward entry point. If the broader market recovers from the most recent sell-off, we'll most likely see PayPal follow its lead and the stock should move toward $85."

Conversely, if the market continues to fall, investors will be able to cut their losses quickly around $72 before any real harm is done, Marwood says. "Therefore, assuming an entry level of $75, this trade gives a decent risk-reward opportunity," he adds.

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On a fundamental basis, the stock is fairly priced at around 24 times earnings before interest, taxes, depreciation and amortization. Although the price-earnings ratio of 50 makes the stock appear more expensive, the company is generating strong revenue, and that's another good sign of growth for PYPL, Marwood says.

Overall, PayPal shapes up to be a healthy choice for growth-minded investors.

"Managers in the space have been adding to their holdings,"Scott says. "Over the full year 2017, U.S. large-cap managers have added 6.13 million shares of PayPal stock to their holdings, bringing total holdings to 109.18 million shares."

Brian O'Connell is a contributing financial writer for U.S. News & World Report. A former Wall Street bond trader and the author of two best-selling books; "The 401k Millionaire" and "CNBC's Creating Wealth", he has 20 years experience covering business news and trends, particularly in the financial, technology, political and career management sectors. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more. Visit his web site at: https://brianoco.contently.com/. Or, visit this Amazon.com link for a list/review of some of his book titles. Reach out to him on LinkedIn.