It was impossible to miss the news…
On Wednesday, online payments giant PayPal announced it would provide crypto wallets, allow users to buy and sell crypto, and even allow purchases using cryptocurrency on its platform. That sent the price of bitcoin to a new high for the year.
Bitcoin rose even further yesterday, along with a handful of other cryptocurrencies.
Now, let me be clear… I’m not personally interested in cryptocurrency as an investment. Right now, most of my wealth is in stocks because that’s where I think the biggest and most consistent returns are.
But I also think crypto’s not going anywhere, anytime soon. And this most recent action could be a boon for a very specific type of company…
This Business Will Benefit from the New Crypto Bull Cycle
You see, as bitcoin rose over 8% after the news, PayPal’s stock (PYPL) also jumped 6%. (Apart from that 2%, the only difference between the two is that Paypal is a business you can own, with a more clearly defined growth path than a cryptocurrency.)
It’s only natural to think other online payments companies will see similar gains as Wall Street starts chasing this idea higher. And if more of them begin to adopt cryptocurrency services, it should only intensify Wall Street’s greed.
Aside from this tailwind, online payments companies are a great business. PYPL has returned over 500% since it went public.
Square (SQ), whose technology is more focused on small business point-of-service (POS) terminals, has returned as much as 1,357% since it went public.
You might look at these two examples and wonder how that’s possible. While PayPal is still running, it’s not the go-to payment service that it was in its heyday. And Square’s terminals are great… but they’re mainly used by small businesses.
Here’s the thing… these companies also boast wildly popular direct payments services – Venmo from PayPal and Cash App from Square. And these are a huge driver of their businesses.
But beyond stock returns and a strong footprint, these stocks have healthy fundamentals (something you can’t say about cryptocurrencies, at least right now):
The global digital payments market revenue is set to nearly double over the next 5 years, projected to grow from $79 billion in 2020 to $154 billion in 2025. That’s a 14% annualized growth rate.
In the past year, payment service provider companies beat the S&P 500 on revenue growth by 4 times, and earnings growth by 10 times
What’s more, these businesses are booming as the world becomes ever more cashless. Cash represented just 26% of all U.S. consumer payments in 2019, according to the Federal Reserve. That’s down from 31% in 2016.
In other words, Credit cards and digital payments make up almost three quarters of all U.S. consumer payments. That’s massive. And as the global market revenue for this sector rises, that trend will accelerate alongside it.
Where to Start Looking
Now, I understand how it might not be desirable to buy companies like SQ or PYPL now, after they’ve spent the last five years running higher. And being high-growth tech companies, they’re priced very expensively. (Square, for instance, trades at an astronomical price-to-earnings (P/E) ratio of 284. That’s compared to 27 for the S&P 500.)
But the universe of online payments is so much bigger than those two companies…
Visa (V), Mastercard (MA), and American Express (AXP), for instance, , are all more cheaply priced than SQ or PYPL on a price-to-earnings basis. And while those aren’t specifically “online payments” businesses, they’re likely to keep a footprint in that space as the trend takes form. Plus, they offer dividends.
And if you’re looking for a way to spread your risk around the online payments space, the ETFMG Prime Mobile Payments ETF (IPAY) holds a basket of 40 of these companies – including everything I’ve mentioned today.
As the global commerce landscape skews ever more cashless, and the crypto trend ignites excitement on Wall Street, this sector will be a good place to be for the coming years.
Patience and process!
Editor, Palm Beach Insider
P.S. Matter of fact, my most recent recommendation to subscribers of my stock-picking advisory Palm Beach Trader was a little-known online payments company.
The funny thing is… I was itching to buy this stock even before Wednesday’s big news. Because for all that news can move stock prices, the real catalyst is always big money.
And this stock is a big-money lightning rod.