The Motley Fool Take
PayPal Holdings is a premier digital payment specialist with a promising future ahead. Other “fintech” (financial technology) companies may be nimbler and growing faster, but PayPal and its Venmo subsidiary remain formidable foes when it comes to competing for the youngest generations of consumers.
According to Piper Sandler’s 2022 “Taking Stock With Teens” report, Venmo and PayPal ranked Nos. 2 and 4, respectively, among young people’s favorite payments apps (Apple Pay was No. 1, and Cash App No. 3). And PayPal’s “Pay in 4″ was the favorite buy-now-pay-later service.
That’s all well and good, but the financials are what really matter. PayPal is experiencing a serious slowdown from early-pandemic growth levels, which has pushed down its stock price. But free cash flow is still substantial, topping $1 billion in the last quarter, and PayPal has a massive user base that continues to use its services, generating income. The company recently boasted 429 million active accounts, $1.25 trillion in payment volume in 2021, and 40,000 transactions per minute.
If PayPal can continue to manage steady expansion and increase profit margins as it scales up, the recent 75% drop from its all-time high last year will have been a great buying opportunity for long-term investors. If you think shares of PayPal might be a good fit for your portfolio, dig into it deeper. (The Motley Fool has recommended and owns shares of PayPal.)
Ask the Fool
From SD in Wilkes-Barre, Pa: What are “Fannie Mae” and “Freddie Mac”?
The Fool responds: Those nicknames represent the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., organizations created by Congress in 1938 and 1970, respectively. Both are designed to help ensure that the US has a stable supply of affordable mortgages.
They provide funding to lenders and then buy many mortgages from lenders, with the proceeds from those sales allowing lenders to issue more mortgages. This keeps mortgages available for homebuyers.
The Federal Housing Finance Agency explains: “By packaging mortgages into [mortgage-backed securities] and guaranteeing the timely payment of principal and interest on the underlying mortgages, Fannie Mae and Freddie Mac attract to the secondary mortgage market investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing. That makes the secondary mortgage market more liquid and helps lower the interest rates paid by homeowners and other mortgage borrowers.”
From HL in Lexington, Ky.: How much of my income should I be saving and investing for retirement?
The Fool responds: An old rule of thumb has been to sock away 10% of your pretax income, but that doesn’t serve everyone equally well. For example, if you haven’t been saving as much as you should have for retirement, you might need to start saving 15%, or even 20% or more.
A financial planner can help you draft a solid retirement plan. (Find a fee-only one near you at NAPFA.org.) Online calculators such as those at Calculator.net and Fool.com/calculators can provide some guidance, too. It’s also smart to learn what you can expect from Social Security — do so by setting up a “My Social Security” account at SSA.gov.
The Fool’s School
As of May 20, the S&P 500 Index, comprising 500 of America’s biggest companies, was down a sizable 18% year to date. The Nasdaq stock market was down much more — 27%. Large drops make many investors panicky. If you approach your investing in a rational way, though, you needn’t panic.
Understand that the stock market is a terrific long-term wealth builder, but it doesn’t go up in a straight line. Volatility is to be expected. Stock market corrections (drops of between 10% and 20%) or bear markets (drops of 20% or more) happen about every other year, on average. While some may last years, they usually last around six months.
To avoid reasons to worry, don’t invest in stocks with money you expect to need within five years — or, to be more conservative, 10 years. You don’t want to amass a bundle for a down payment on a home only to have the market drop right before you planned to sell many stocks. Park short-term money in less volatile investments, such as certificates of deposit or money market accounts.
It’s also smart to focus on percentages, not points. If you see a headline that says “Dow plunges 300 points,” you need to take that in context. When the Dow Jones Industrial Average is around 32,000, a 300-point drop is less than 1%. Even large percentages aren’t portents of doom — the S&P 500 plunged by about 38% in 2008, for instance, but that was followed by double-digit gains in five of the next six years.
It’s often best to just hang on through downturns, but there can be some cases when selling is the right thing to do. For example, if you have little idea what a company you’ve invested exactly in does or how it makes its money, it would be best to learn more about it — or sell. Having studied a company and knowing it well will help during a downturn. You’ll know whether the company is facing long-term problems, or if it has just retreated temporarily along with many other stocks.
My Dumbest Investment
From S., online: My dumbest investment hurts. It was a friend. It was a private investment. He was letting us in on the ground floor. It was a sure thing. (It was fraud.) We never had money to invest, but an uncle had just passed away and left us a small inheritance to invest toward our kids’ college. Of course, our “friend” knew this. We were the ones who got the education.
The Fool responds: Ouch. As you’re now well aware, it’s smart to be wary of any hot stock tip or investment opportunity offered by an acquaintance, or even one you read about online. Your hard-earned money is on the line, as are the goals for which you’re saving and investing, so do some additional digging.
Getting in on the ground floor of a promising young business can be exciting, but it’s not without risk. Lots of small businesses (including the many without ongoing fraud) never become big ones, and plenty end up failing altogether. Even if a private investment succeeds, you may have trouble cashing out. If you decide to invest, don’t put too many eggs in one basket. Perhaps cap each such investment at no more than, say, 3% to 5% of your overall portfolio. And if you’re not sure whether to invest after researching, just don’t. You can park inheritance money and savings in a low-fee broad-market index fund and likely do well over the long run.
Who am I?
I trace my roots back to 1957, and I’m a product of several major acquisitions and a big merger. I’m privately held but not a small operation, with annual revenue of around $20 billion. I’ve had more than 800,000 employees since April 2021, when I acquired the security specialist G4S, which had 533,000 workers at the time. (I’m now among the 10 biggest employers both in the US and globally.) With headquarters in Conshohocken, Pa., and Santa Ana, Calif., I offer security guards along with janitorial, landscaping, consulting and other services. I operate in more than 90 countries. Who am I?
Can’t remember last week’s question? Find it here.
Last week’s trivia answer: Lockheed Martin