The recent stock market sell-off created opportunities for investors. Picking shares of great companies from the discount bin could pay rich returns down the road.
But not all companies that have been hammered of late are good buys. Indeed, some are better left alone, as they face substantial headwinds that could make them terrible investments. Let's look at one company investors should consider following the recent downturn and another company that does not seem to be worth investing in today.
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The company to buy: PayPal
Fintech giant PayPal (PYPL -1.80%) has been a victim of marketwide issues, but the company also faced headwinds of its own. Investors punished the tech company's shares after it reported its fourth-quarter and full-year 2021 results. PayPal's active account growth rate seems to be slowing, and that's one thing investors are worried about. However, I remain bullish on this stock; here's why.
PayPal ended 2021 with 426 million active accounts, representing a 13% year-over-year increase. The company's massive userbase arguably grants its platform a network effect. The more people who open a PayPal account, the more it becomes an attractive payment option for merchants. And the more merchants that join the network, the more people are attracted to PayPal.
The network effect is a powerful competitive advantage -- and possessing a moat is critical in a space as competitive as the fintech industry. Last year, PayPal announced a partnership with Amazon that started in January and allows U.S.-based customers on the e-commerce platform to checkout through their Venmo (PayPal's peer-to-peer payment app) accounts.
In my view, PayPal is still in the early days of its efforts to monetize Venmo, and investors can expect the tech giant to enter similar partnerships with other big-name online retailers in the future. PayPal's competitive advantage will only grow as a result. PayPal does boast other opportunities, including its venture into the buy now, pay later market.
While estimates vary (as they always do), some project that the fintech market will expand at a compound annual growth rate of 13.7% through 2026. It likely won't stop there. As one of the players with a considerable base of users and strong brand recognition, PayPal is ideally positioned to profit from the trend. On top of this, the company is already projecting that revenues will grow by 20% this year. Therefore, for long-term investors, PayPal looks like a buy today.
The company to avoid: Alibaba
At first glance, Alibaba (BABA 0.52%) looks like an excellent stock. The company is one of the leading e-commerce players in China, the world's most populous nation. Alibaba is also the leader in the cloud computing space in the country. Both of these industries have considerable room to grow, which would, of course, benefit Alibaba.
But there is one major thing to worry about with this company, namely the regulatory environment in China. The Chinese government has been cracking down on tech giants in the country for some time now. The best example of that: Last year, Alibaba announced a hefty fine of $2.8 billion imposed by China's State Administration for Market Regulation for alleged anti-monopoly violations. That was the largest fine ever levied by the agency.
The regulatory environment in China makes investing in companies there pretty risky since no one knows what regulators will do next. And that's before we get into the geopolitical tensions between the U.S. and China and the impact that can have on specific stocks. Although the company is profitable, analysts expect its growth to stagnate over the next five years coming in at less than 1% annually.
To be fair, Alibaba's financial results have sometimes fallen short of expectations. Still, given its strong position in e-commerce and cloud computing in China, Alibaba might have been an excellent stock to buy, were it not for the regulatory environment in its home country. Given the uncertainty this aspect adds to the business, I think it's best to stay far away from Alibaba stock, at least for now.
