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PayPal (PYPL)

This online payment company beat estimates by two cents last quarter, and analysts have raised the company’s earnings estimates four times in the past 30 days.

PayPal (PYPL)

PayPal (PYPL), which was spun off from eBay (EBAY), was added to the Million Dollar Portfolio today.

PayPal is one of the leaders in the booming global payments business, and the company’s prospects are great, especially with its newfound independence. As e-commerce continues to grow prolifically, PayPal has the opportunity to grow with it, and capture an even larger share of the market as more and more transactions are made on mobile devices.

During the 13 years of owning PayPal, eBay shares soared 317%. That compares with gains of just 167% for the Nasdaq and 88% for the S&P 500. PayPal’s strong performance helped fuel eBay’s business in the last decade and contributed to the growth in the company’s share price. Now as a newly public company, PayPal should continue to outperform.

With more and more commerce moving online, the global payments business is booming. Last year, PayPal served 162 million customer accounts. The total volume of those transactions was $235 billion, increasing 26% year-over-year. With nearly 4 billion transactions last year, including 1 billion mobile transactions, PayPal is a payments powerhouse.

PayPal’s business benefits from two important trends. First, Internet commerce is growing. Increased global transactions benefit PayPal’s business. Second, mobile payments is the fastest growing segment of the online payments business. With 25% of its transactions happening on a mobile device, PayPal clearly is in a strong position.

Last year, PayPal had revenues of $8 billion and net income of $419 million. For the full fiscal year, the Street’s estimates are for EPS of $1.24 on revenues of $9.19 billion. That translates into a healthy 15% revenue growth rate. Meanwhile, earnings are expected to surge more than 250%.

2016 should be a more normal year for PayPal. Next year, revenues are expected to grow at a healthy 16% clip. Meanwhile, EPS could jump 19%.

The prospects for expanding the business are great. The company is armed with $6.6 billion of cash. That gives PayPal lots of room for investing in new technologies or making acquisitions of other payments players. One major opportunity is retail payments. Today, PayPal is a big player in the $1.5 trillion online payments business. But it doesn’t have much of a stake in the $22 billion retail transaction business.

By using smartphone applications, PayPal can allow its customers to make purchases at stores using their smartphones and the PayPal app. That could open the door to increasing the number of transactions.

Another opportunity is the expansion of its online payments business. Today, 74% of the top online merchants allow for payments with PayPal. Many companies that refused to accept PayPal made this choice because they competed with eBay.

But now that PayPal is an independent company, they may be more willing to partner up. This could mean that e-commerce giants—including Amazon and Zappos—will begin accepting PayPal.

Based on the current outlook from Wall Street analysts, the stock is trading at 27 times 2015 EPS and 23 times 2016 EPS estimates. Shares of PayPal are worth at least $45 in the near term. And they are potentially worth more than $50 per share over the next year or so.

The longer-term outlook for the stock is even more favorable. PayPal should continue to benefit from the growth of online e-commerce transactions. As a pure play on this opportunity, PayPal shares deserve a premium valuation.

Recommended Action: Buy PayPal shares below $36.

Ian Wyatt, Ian Wyatt’s Million Dollar Portfolio,, 802-434-6900, September 8, 2015 & Special Report, September 2015