PayPal Holdings Inc is going on a spending spree

PayPal Holdings Inc (Nasdaq: PYPL) made a big splash earlier this year when it paid $2.2 billion for Swedish payment company iZettle. However, PayPal says it is planning to continue to commit $3 billion per year to mergers and acquisitions, and analysts say M&A will be a key part of PayPal's growth and international expansion.

In an interview with German publication Handelsblatt, PayPal CEO Dan Schulman says PayPal has specific capabilities it wants to enhance as is expands its business from a U.S. payment processor to an international payment services leader. 

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"We have a healthy balance sheet and we are ready to put it to work to buy more companies," Handelsblatt says.

The iZettle buyout was PayPal's largest deal, but Handelsblatt said he's open to the possibility of more large deals under the right circumstances. "I wouldn't rule out that we take on a bigger deal if there's a good fit for us," he said.

An aggressive M&A strategy is certainly nothing new to long-term PayPal investors. CFRA analyst Scott Kessler says PayPal has stable margins, a healthy balance sheet and robust cash flow that allow for plenty of flexibility when it comes to both buyouts and capital return.

"M&A has been a key element of PYPL's growth strategy and we note the purchases of TIO Networks in July 2017 for $238 million, Xoom in November 2015 for $1.1 billion, Paydiant in April 2015 for $230 million and Braintree in December 2013 for $713 million," Kessler says.

Kessler is expecting PayPal to generate annual revenue growth of between 16 and 17 percent from 2018 to 2020.

"We think growth will be driven by increasing adoption of PYPL by consumers and merchants, expansion outside the U.S. and further penetration across mobile offerings and devices," Kessler says.

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Prior to the iZettle buyout, international business had been a weak spot for PayPal. However, iZettle provides PayPal with access to roughly half a million brick-and-mortar retail stores in 11 new international markets, including France, Germany, Brazil and Mexico. The iZettle deal and any subsequent international acquisitions will help PayPal compete against Square (SQ) in the global payment services market.

CFRA has a "hold" rating and $78 price target for PYPL stock.

Copyright 2017 U.S. News & World Report

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