Compass Point: Buy PayPal

In a report published Friday, Compass Point analyst Michael Tarkan initiated coverage of Paypal Holdings Inc (NASDAQ: PYPL) with a Buy rating and price target of $45. The company is well positioned due to its impressive growth, robust global brand and balance sheet to continue to benefit from secular move towards ecommerce, despite intensifying competition.

PayPal's annual revenue growth is higher at over 15 percent than Visa, Inc. (NYSE: V) and Mastercard Inc (NYSE: MA), while its merchant services volume has been growing at 30-35 percent, "more than doubling growth in overall e-commerce, suggesting the company is taking share," according to the Compass Point report.

Ecommerce has been growing at 15 percent annually since 2Q10 but still accounts for less than 10 percent of total retail sales. This growth offers "secular tailwinds" for PayPal.

In addition, PayPal has $6.6 billion in cash and investments and no debts, while the management expects to generate free cash flow of $1.6-$1.8 billion in 2015. The company could also be an attractive takeover candidate with larger technology and ecommerce entities looking to enter into the payments sector.

On the other hand, the competition across all the company's operating segments has been intensifying, which the analyst expects to impact take rates in the near future.

Also, "although PayPal processed 1 billion mobile transactions in 2014 and has time to develop a more effective mobile offering, we see it as more of a middle man today relative to the card networks and market-leading hardware players," Tarkan stated.

The analyst, however, expects the company to generate steady operating margins and adjusted EBITDA over the next three years, with FX-neutral revenue growth of about 15-17 percent.