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Adding $500 to These Top Stocks Would Be a Brilliant Move | The Motley Fool

Adding to your winners, even just $500, can be a great way to juice your portfolio returns over the long run. Companies that have strong stock appreciation can often continue that momentum for years, even decades.

We asked three Motley Fool contributors to pick one company that they’d have no hesitation to add to today. They picked PayPal (NASDAQ:PYPL), Qualcomm (NASDAQ:QCOM), and Twilio (NYSE:TWLO).

Image source: Getty Images.

PayPal: It’s still early innings for the digital payments revolution

Danny Vena (PayPal): In the realm of digital payments, PayPal was the pioneer that started it all. The company made e-commerce practical by introducing an online payment system to the masses — which is still widely used today — as well as having bragging rights to the first widely used digital wallet. 

Since the company’s much-publicized divorce from eBay in 2015, PayPal has made a host of moves to expand its existing business, partnering with the biggest banks and credit card issuers in the industry to ensure that its customers can use any payment method at their disposal without ever leaving the PayPal app.

Then there’s the emerging peer-to-peer (P2P) payment systems space, and no discussion about the most popular entrants would be complete without a nod to PayPal’s Venmo. The app, which began as a way to send money to friends or split a bill at a restaurant, has evolved to represent a growing digital payments platform that can also now be used to pay retailers and other merchants.

Many investors have classified PayPal as a COVID-19 play, linking the company’s growth to the onset of the pandemic, but history proves otherwise. In 2019, before the pandemic, PayPal delivered a record-setting year across many metrics, including revenue, net income, and operating margin. 

That said, there’s little doubt the pandemic accelerated an already robust trend toward touchless payments and digital wallets, a space that PayPal absolutely dominates. The company saw the opportunity and pounced.

Last year, PayPal built on its record 2019 by delivering the strongest performance in the company’s history. It added a whopping 72.7 million net new active accounts, which pushed its total payment volume (TPV) of $936 billion up 31%. These strong fundamentals resulted in revenue that grew to more than $21 billion, up 21%, and generated profits that grew 71%. 

If you think PayPal’s growth engine is out of gas, think again. During the second quarter, the company added 11.4 million new accounts, which in turn drove TPV of $311 billion, up 40% year over year. This translated to net revenue of $6.24 billion, up 19%, and adjusted profits that climbed 8%. Not bad, considering the tough comps PayPal faced in the wake of its back-to-back record-setting years. 

Financial technology and digital payments are only just getting started, and while PayPal is the clear leader, its execs believe this is just the beginning. “Our aspiration is to have a billion people on our platform,” CEO Dan Schulman told attendees at an investors’ conference early last year. With 403 million current users, those seemingly pie-in-the-sky aspirations aren’t that far off.

Couple exploring the wilderness with a connected mobile device.

Image source: Qualcomm.

Qualcomm: An essential 5G chip stock investors should not forget

Will Healy (Qualcomm): Apple‘s upcoming release of the new iPhone should draw interest back to the smartphone market and, by extension, to Qualcomm. For all of the efforts to develop its own chip, Apple and its smartphone competitors remain dependent on Qualcomm and its massive portfolio of wireless patents to produce their premium devices.

Qualcomm has benefited from a massive 5G upgrade cycle. Grand View Research forecasts a compound annual growth rate for this industry of 69% through 2028, taking the industry’s value to over $66 billion by that year.

Notwithstanding this opportunity, Qualcomm faces some uncertainty regarding its dependency on Arm Holdings. Arm licenses low-power chips to Qualcomm that go into 95% of all premium smartphones, so Nvidia‘s move to acquire that company has caused deep concerns. Not surprisingly, Qualcomm has spoken out against this deal, and the U.K. has delayed approval, citing concerns about competition. Such hold-ups dramatically increase the chances the takeover will not occur, thus bolstering Qualcomm’s competitive advantage and possibly, its stock.

Also, even with this uncertainty surrounding Arm, Qualcomm earned revenue of $24.2 billion for the first nine months of fiscal 2021. This is an increase of 60% compared with the same period in 2020. Earnings rose 179% during that timeframe to $6.2 billion as its total costs grew at a slower pace.

For Q4, the company forecasts between $8.4 billion and $9.2 billion in revenue, a 5% increase from year-ago levels at the midpoint. However, the 2020 figures point to a frontloading of Qualcomm’s revenue growth since the company benefited from a combination of Apple’s first 5G iPhone release and higher chip sales amid the COVID-19 pandemic. This strengthens the likelihood that revenue increases will return to double-digit levels as the pandemic weighs on the economy less.

Qualcomm may not fully reflect this potential — the stock rose by just 22% over the last year. Moreover, its P/E ratio of 17 seems low, even if revenue growth temporarily slows into the single digits. Its valuation remains well under Apple’s earnings multiple of 29 and Nvidia’s 80 P/E ratio.

The low multiple could persist for a time as the status of Nvidia’s Arm acquisition could continue the uncertainty in the near term. However, as new phone updates introduce more consumers to the 5G world, Qualcomm stock should begin to see more benefit as the upgrade cycle continues.

Programmer using a laptop with a Twilio logo.

Image source: Twilio.

Twilio: More than just a messaging platform

Brian Withers (Twilio): Twilio is probably best known for the messaging service that Uber built using its platform. The capability for riders and drivers to easily and privately message each other was key to making a great user experience for Uber users. The company has come a long way since then. Although messaging is still a core capability, Twilio has added so much to its suite of products. It is likely that the market may be underestimating the long-term potential of this winner. Before we dive into the details of its massive market, let’s take a look at the most recent results.

Metrics

Q2 2020

Q1 2021* 

Q2 2021*

QOQ change

YOY change

Revenue

$401 million

$590 million

$669 million

13%

67%

Active customers 

200,000

235,000

240,000

2%

20%

Dollar based net expansion

132%

133%

135%

+2%

+3%

Data source: Company earnings releases. *Note: Includes $45 million and $47 million of Segment revenue, respectively. QOQ = quarter over quarter. YOY = year over year. 

Although the revenue numbers in the table above include the contribution from Twilio’s Segment acquisition, organic growth is coming in at a stellar 55% year over year for the most recent quarter. In addition to solid growth, investors love that the company continues to land customers at a rapid pace, and gets them to consistently expand their spending over time.

But the company isn’t done growing by any means. It has been working hard to expand its total addressable market and increase its optionality. In 2017, it estimated its addressable market as $45 billion. Today, with additional capability and demand accelerating for its technology, its 2023 expected TAM is now $110 billion. The company splits this into seven substantial subgroups. The three largest groups represent $23 billion to $25 billion markets separately: email and marketing campaigns, API (application programming interface), and its customer data platform. These large addressable markets give Twilio plenty of room to grow for many years to come. 

Between its execution success and its massive addressable market, Twilio’s stock carries a premium valuation of 25 for its price-to-sales ratio. This might scare away value investors, but for those interested in a long-term growth story, adding $500 to this stock today could prove to be a lucrative decision. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


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