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Amazon.com ’s (ticker: AMZN) stock is up more than 40% in the past 12 months, and investors are convinced the company will continue to post higher earnings from its Internet businesses. PayPal Holdings (PYPL) could also benefit mightily from the shift in consumer preferences to online and mobile payments and away from cash. Unlike Amazon, however, PayPal shares have underperformed in the past year, falling 3% over the same period, while the market is up 3%.

PayPal is a well-known brand among consumers, as an easy click to pay for a purchase. Yet it is less recognized by investors, despite a $45 billion market cap. PayPal was spun out as a separate company only last year from its former parent eBay (EBAY).


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Investor awareness could rise in the next couple of years thanks to PayPal’s strong growth profile, and so could the stock, by perhaps a third from Friday’s close of $37.65. Total payments volume, $86 billion in the second quarter, rose 29% and continues to outpace e-commerce growth as a whole. The even-faster rise seen in its mobile payments, up 56% to $24 billion, will be a strong earnings driver in the future, too.

PayPal generates most of its revenue by taking a little piece of the price of every purchase processed through its platform. Typically its share runs about 2.9% of the purchase price, plus 30 cents, but that can vary. The company’s “take rate” from the fee depends on the payment source. PayPal might give 2% or so of the first 2.9% to a credit card company, if a card is used, but it doesn’t have to share when a PayPal account is used.

And therein lies the main knock on PayPal. Transaction revenue dropped to 2.88% of total payments volume last year from 3.35% in 2012, according to Bloomberg Intelligence. (The company doesn’t give out detailed data.) A deal reached last month with Visa (V) reinforced worries that PayPal’s operating profit margins—14% in the second quarter, down from 17% in the year-ago period—could be pressured in the future.

Through Visa, PayPal will be able to get more “in-store” business, but it also will raise the mix of less profitable revenue from cards and bigger merchants, who pay lower fees. That could pressure margins. There is also a threat from Apple Pay and similar competitors. Margins would be an issue if PayPal weren’t growing so fast in so many different directions, says Dave Hartzell, president of Cornell Capital Management, an institutional investor that has recently bought PayPal shares. “Absolute profits are still growing quickly,” he says.

Sharply growing volumes and market share will offset margin issues, he predicts.

The Visa agreement was a shotgun wedding, says the money manager, and it will raise transaction costs for PayPal, but end a potential war with the global-payments company. The deal also makes possible accords with other card issuers, attracting new customers and driving transaction volume.

PayPal is the dominant player in the transaction space and that should continue. In the second quarter, active customer accounts rose 11% and transactions processed grew 25% to 1.4 billion. The San Jose, Calif.–based firm generated $495 million of cash flow in the latest quarter, Hartzell says, which will help it make investments in the future, or strategic deals with other payments companies. It previously acquired Venmo and Xoom.

The payments-processing future is increasingly moving to mobile, where PayPal is strong. “Millennials don’t want to use cash or cards,” Hartzell says. “They want to use their smartphones in a frictionless transaction.”

Second-quarter volume at PayPal’s Venmo peer-to-peer service rose 141%, to nearly $4 billion. Venmo is a digital wallet that allows users to split their lunch or Uber cab charges, among other bills, via phones linked to cards, bank accounts, and PayPal accounts.

Moreover, it might surprise investors to know of PayPal’s global reach. Roughly half of sales are overseas, using 100 currencies. PayPal is available to about 170 million consumers and 14 million merchants. Such scale can be attractive to future customers.

Admittedly, PayPal has had a short life as a publicly traded company, but it has no long-term debt and about $4 per share in cash. The stock trades at a low valuation compared with its peers and the market.

Its price/earnings ratio—28 times analysts’ 2017 earnings forecasts of $1.36 a share—isn’t cheap on an absolute level, but then, corporate profits generally are barely growing. That earnings number is based on generally accepted accounting principles. The non-GAAP consensus estimate, which the Street uses, is $1.73, for a P/E of 22.

The global trend of consumers moving away from cash is likely to accelerate and PayPal could be a big beneficiary.

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