3 Reasons PayPal Holdings Inc (PYPL) Stock Is a Top-Notch Buy

The mobile payments space remains one of the hottest corners of Silicon Valley. Stripe, which is a fast-growing startup in the category, recently snagged an investment round at a valuation of $9 billion, up from last year’s $5 billion. Yet this enthusiasm hasn’t had much of an impact on PayPal Holdings Inc (NASDAQ:PYPL). For 2016, the shares have only gained about 9%, so is it time investors start taking a closer look at PYPL stock?

I think so. Keep in mind that the company’s growth has continued at a nice pace. In the latest quarter, revenues jumped by 18% to $2.7 billion and net income came to $323
million.Interestingly enough, PayPal has been showing lots of strength in foreign markets, such as in China. So what else makes PYPL stock a good investment right now? Let’s take a look at three key factors:

Reason to Buy PYPL Stock : The Mobile Megatrend

This holiday season, consumers are ramping up their use of smartphones as digital wallets. In fact, last week’s Black Friday was the first time that mobile purchases exceeded $1 billion on a daily basis, according to research from Adobe Systems Incorporated (NASDAQ:ADBE). There was a 33% increase compared to last year.

Even traditional brick-and-mortar operators are reaping the benefits. About 60% of online orders for both Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) came from mobile sources over the weekend. They have been investing in their apps, allowing for features like tracking of promotions, loyalty points, gift cards and merchandise availability.

And the mobile payments industry is expected to experience strong long-term growth. According to eMarketer, U.S. volume alone is forecasted to jump from $8.71 billion in 2015 to a whopping $210.45 billion by 2019. However, keep in mind that about 85% of global transactions are still done with old-fashioned cash.

Reason to Buy PYPL Stock: The Moat

PayPal stock has many tough competitors to contend with, including traditional financial firms like Citigroup Inc (NYSE:C), Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM), as well as mega online operators, such as Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple Inc. (NASDAQ:AAPL).

Despite all this, PYPL stock still has some big-time advantages. First of all, the company is the pioneer of the payments space, having been founded back in 1998. As such, PayPal has had time to build a solid brand and a top-notch infrastructure. The company has also been able to develop systems to deal with complex issues like fraud.

Another big bonus for PayPal stock is that it has a diverse platform. Besides the core payments service, there is Xoom (which allows for international remittances for families and friends), Braintree (provides third parties the ability to handle transactions) and Venmo (which is a mobile app that is a must-have for Millennials).

Yet PYPL also realizes it cannot do everything. This is why the company has been aggressive in forging alliances. Just some of the marque partners include Visa Inc (NYSE:V), Mastercard Inc (NYSE:MA), Alibaba Group Holding Ltd (NYSE:BABA) and Facebook Inc (NASDAQ:FB).

Reason to Buy PayPal Stock: Buyout Potential

The intense competition in the mobile space is a clear indication of the market’s strategic importance, and a good way to get a solid foothold is to strike an acquisition. No doubt, PayPal stock is certainly among one of the few with tremendous scale — there are about 192 million active customer accounts — and a diverse set of assets.

The good news is that many of the potential suitors include some of the world’s most valuable companies, like GOOG, AAPL, FB, Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT).

What’s more, there is still much room for a lucrative bid. According to InvestorPlace.com’s Dan Burrows: “PYPL stock currently changes hands at 23 times forward earnings. That’s a rather slim premium for a company with a projected compound annual growth rate of 17% for the next half decade. That’s especially true in a bull market, where multiple expansion is the order of the day.”

3 Worries About Twilio Inc (TWLO) Stock

It’s actually not easy to find faults with Twilio Inc (NYSE:TWLO). The company was spot-on when it launched back in early 2008, when cloud computing and mobile apps were ready to take off. Since then, the company has continued to add critical features to its communications platforms, such as voice, messaging and video. It also helps that TWLO stock has a solid business model, which is focused on getting buy-in from developers.

The result is that the customer base has been quite loyal.

So yes, growth has been torrid as well. In the latest quarter, revenues shot up 62% to $71.5 million and the net loss was a reasonable $11.3 million, down from $12.4 million in the same period a year ago. TWLO has marquee customers like Uber, Facebook Inc’s (NASDAQ:FB) WhatsApp and Airbnb

Is it any wonder that TWLO stock has a hefty market cap of $3.5 billion? Of course not.

Yet this does not mean that Twilio stock is a no-brainer investment opportunity (hey, what stock really is?) The fact is that there are some clear issues that can cause problems.

So let’s take a look at three:

Twilio Stock Risk No. 1 — Growth Path

For any new-fangled tech company, there is usually a stall in growth. TWLO stock is certainly vulnerable to this — and it could come sooner rather than later.

One factor is the presidential election. True, part of this is the uncertainty about immigration. No doubt, for a company like TWLO, there is a big-time need for highly skilled talent — and many top engineers are not U.S. citizens.

Although, this may be a side issue. If anything, there is something else about the election that could have a much bigger impact: CEO indecision. Given that much still needs to be fleshed out about Donald Trump’s policies, the inclination is to hold off on making IT purchase decisions.

Keep in mind that TWLO has already been making a major shift in selling to larger enterprises, as seen with new offerings like the Twilio Enterprise Plan. And so, revenues could get lumpy, which will likely weigh on the valuation of the stock.

Twilio Stock Risk No. 2 — Customer Concentration

It’s not uncommon for early stage companies to have a large proportion of revenues come from a small number of companies. Yet it does pose potential risks. If just one of the companies terminates a contract — or fights for a tougher negotiation on terms — there can definitely be an adverse impact on the top line.

Unfortunately, this is real potential threat for TWLO. Consider this from the company’s latest 10-Q Filings: “We currently generate significant revenue from our largest customers, and the loss or decline in revenue from any of these customers could harm our business, results of operations and financial condition.”

About 31% of revenues come from TWLO’s 10 largest customers. And among these, two represent 23% of revenues.

Oh, and many of these customers do not have long-term contracts. Instead, the fees are based on usage. So if there is a slowdown in economic growth, then there could be a hit to revenues for Twilio Inc.

Twilio Stock Risk No. 3 — Valuation

Since coming public in late June, TWLO stock has been on a rollercoaster. The shares quickly shot up from $15 to $71. But during the past month or so, things have gone in reverse. The Twilio stock price is now around $38.

Such wild swings are normal for IPOs, especially for hyper-growth companies. But even with the steep plunge, the valuation on TWLO stock is still at premium levels, fetching a price-to-sales ratio of 13X. Keep in mind that New Relic Inc (NYSE:NEWR) is at a much cheaper 8X and Box Inc (NYSE:BOX) sports a multiple of 6X.

Something else: On Dec. 20, the lockup provision will expire. This means that insiders will be allowed to sell their shares. While this does not mean there will be an avalanche of dumping of TWLO stock, there could still be meaningful pressure. After all, many insiders could be more encouraged to take profits because of the volatility.

If so, the bear move on Twilio stock may not necessarily be over — at least for the near-term.