Nick Train: Why portfolio’s biggest loss-maker still has bright future ahead

In his latest monthly report, Train said PayPal was the portfolio’s biggest faller during the month of February, despite the fact it “possesses significant structural advantages” such as the compounding of its free cashflows at 18% per annum over the last seven years.

The stock became known as one of the biggest winners from lockdown, as sales volumes increased by a third during the 2020-2021 financial year while its user base grew to 426 million, meaning its share price trebled over the time period as people switched to online shopping.

Nick Train uses DMGT cash to top up Fever-Tree and Experian

However, Train described the stock’s popularity as “transient”, with PayPal’s share price having fallen by 42% year to date.

“Announcing the results earlier this month CFO John Rainey commented: “We arguably just had one of the best years in our history when you examine our financial metrics, eclipsing $25bn in revenue and generating almost $5.5bn in free cash flow”,” Train pointed out. “”By virtually any measure, we are a market leader in digital payments, and we will continue to grow faster than the market. There are very few companies of our size with our global reach, with our growth rate, and cash generation.”

“Yet the shares fell 26% in response.”

Train reasoned that PayPal’s “sin” could have been signalling slower revenue growth on the horizon, having predicted a 20% uptick into 2023 which will come from a new focus on higher-net worth users.

“But even post-pandemic, the broader e-commerce trends benefitting PayPal are not going away, and there was a lot to like about the results,” the fund manager reasoned. “At a time when competition is front of mind, not only is PayPal’s acceptance (at 76% of the top 1,500 US/EU retailers) still almost three times that of their nearest rival, but it also gained 2% of share at the checkout.

“With pricing power topical in today’s inflation-spooked environment, we note that PayPal raised merchant prices by over 50 basis points yet simultaneously signed up a further five million.”

He added: “This doesn’t mean competitive threats can be ignored, but the company clearly has a strong position to defend in a rapidly growing industry.”

Cashing in on the transition to a cashless society

Even if the stock’s growth steadies relative to its skyrocketing performance during the first year of the pandemic, Train pointed out that “eternal 30% growth was never part of our long-term thesis”.

“We would argue that if top and bottom-line growth can be sustained at mid to-low double digit rates for anything like the long term, then today’s generous free cashflow yield of over 4% represents extremely good value,” he continued.

“PayPal is a robust business and so are the other key holdings in the portfolio. Diageo, Heineken, LSE, Mondelez, Nintendo, RELX and Unilever will each be impacted by 2022 macro and geopolitical events, separately and differently, but we have no existential worries about their brands and franchises.

“Investors sometimes forget – survivability is a valuable characteristic.”

Lindsell Train investment trust, which has a net asset value of £2bn and total assets under management of £220m, has lost 10.7% over three years compared to its average peer in the IT Global sector’s gain of 46.9%, according to data from FE fundinfo.

It is currently trading on an 8.7% premium to NAV according to AIC data, and has a dividend yield of 4.2%.