Business Overview

PayPal is a widely recognized digital payments platform which was founded in 1998 and has grown to become one of the world's largest and most popular online payment systems.

Paypal's business model is based on facilitating payments between individuals, businesses, and merchants, with the aim of simplifying the process of sending and receiving money online.

Paypal charges net transaction fees to both merchants and consumers based on the total payment volume completed on its platform. It earns additional revenue through value-added services, such as currency conversion, cross-border transactions, instant fund transfers, cryptocurrency transactions, and other fees.

Additionally, Paypal generates revenue from interest and fees on loans receivable and underlying customer balances.

Overall, Paypal's business model is focused on providing a seamless and secure payment experience for its customers while generating revenue from various sources.

Brands under Paypal:

• PayPal

• Braintree

• Venmo

• Xoom

• Hyperwallet

• PayPal Zettle

• PayPal Honey

• Paidy

Paypal’s revenue segments:

1. Transaction revenues

Paypal earns net transaction fees on its payment platform based on completed total payment volume, with additional fees charged for currency conversion, cross-border transactions, instant fund transfers, cryptocurrency transactions, and more.

2. Revenues from other value added services

Paypal earns net revenues from partnerships, referral fees, subscription fees, gateway fees, and other services offered to merchants and consumers. It also earns revenue from interest and fees on loans receivable and underlying customer balances.

Paypal’s Global Market Share (Sept 2022. Source: statista)

Competitive Advantages

Paypal is a well-established and widely recognized company in the digital payments industry, offering an array of services to its customers. The company has several competitive advantages that have helped it maintain its leading position in the market:

1. Strong brand recognition: Paypal is a household name that is synonymous with digital payments. The company has been in the market for more than two decades, and its brand is widely recognized and trusted by consumers worldwide. This strong brand recognition has given Paypal a significant competitive advantage over its competitors, as consumers tend to prefer using a well-known and reputable brand for their financial transactions.

2. Easy to use platform: Paypal has a user-friendly platform that is easy to navigate and use. The platform is designed to be simple and straightforward, allowing customers to make payments quickly and easily. This ease of use has helped Paypal to attract and retain customers, particularly those who are not tech-savvy.

3. Wide range of services: Paypal offers a wide range of services to its customers, including online payments, peer-to-peer payments, mobile payments, and e-commerce solutions. The company's diverse portfolio of services has helped it to cater to the needs of different customer segments, giving it a competitive advantage over companies that offer limited services.

4. Strong partnerships: Paypal has established partnerships with several leading companies, including Visa, Mastercard, and Facebook, among others. These partnerships have helped Paypal to expand its reach and increase its customer base. The company's partnerships have also enabled it to offer additional services to its customers, such as the ability to link their Paypal accounts to their credit cards.

5. Robust security measures: Paypal has invested heavily in security measures to protect its customers' information and transactions. The company uses advanced encryption technologies and fraud detection systems to ensure that its platform is secure. These security measures have helped to build trust with customers, giving Paypal a competitive advantage over companies that do not prioritize security.

Industry

PayPal operates in the financial technology industry, commonly referred to as fintech. Fintech is an emerging industry that leverages technology to provide financial services and products to customers in innovative ways.

Tailwinds:

1. The global digital payment market size is expected to expand at a compound annual growth rate (CAGR) of 20.8% from 2023 to 2030.

2. The global E-commerce market will reach $ 62,415.2 billion by 2030, growing by 11.0% annually over 2021-2030.

Track Record

Over the years, Paypal has demonstrated impressive revenue growth, driven by increasing transaction volumes, expansion into new markets, and strategic acquisitions:

PayPal's revenue growth has translated into strong operating income and free cash flow generation:

Risks

As a major player in the financial technology industry, PayPal faces a range of risks that could impact its business operations and financial performance. Some of the significant risks faced by PayPal include:

1. Regulatory risks: PayPal operates in a heavily regulated industry and is subject to various laws and regulations, including anti-money laundering and data privacy laws. Any changes in the regulatory environment or failure to comply with these regulations could result in significant penalties, fines, and legal liabilities.

2. Competition: PayPal operates in a highly competitive industry and faces intense competition from other major players. Any failure to innovate or adapt to changing market conditions could result in loss of market share and revenue.

3. Economic risks: PayPal's financial performance is impacted by macroeconomic factors such as interest rates, inflation, and consumer spending. Any adverse changes in the economic environment could impact PayPal's financial performance and growth prospects.

Valuation

Paypal’s stock price experienced a massive drawdown recently:

Because of the massive drawdown, P/E is now at an all time low which presents an opportunity for investors:

The average P/E of Paypal from 2015 to 2022 is 35x. 33x if we replace the P/E of Paypal in 2020 (60.4x) with the next highest P/E (38.7x in 2017).

The 5-year average P/E (2018 to 2022) of Paypal is 38x. 32x if we replace the P/E of Paypal in 2020 (60.4x) with the next highest P/E in the 5 year period (34.8x in 2018).

In short, the current P/E of Paypal is very far from the all time and 5-year average even after replacing the very high P/E in year 2020.

For additional context, Nasdaq 100 P/E (LTM) is 24x and the 5-year average is 26x:

Paypal’s P/E compared to some of its peers for the last 5 years:

Paypal’s P/E compared to some of its peers for the last 10 years:

Price/Free Cash Flow of Paypal is also at all time low:

Investors who loves free cash flow will love Paypal’s yield. Yield is high relative to enterprise value and market cap:

Forecast

Revenue, EPS and free cash flow are all forecasted to keep on growing:

Here’s the forward P/E of Paypal using the estimates:

DCF

Using a 10% discount rate, 11% free cash flow growth rate and 2% terminal growth rate:

DCF (Conservative)

Using a 10% discount rate, 5.5% free cash flow growth rate and 2% terminal growth rate:

Reverse DCF

Monthly Chart

In a technical perspective, price of $PYPL still has a lot of room to fall. Next major support is around $39.

Other Infos

Merchants sell more with Paypal:

Paypal will continue to return capital to shareholders. FY'23 share repurchases is expected to reach ~$4 billion:

“For the full year, we continue to expect to generate approximately $5 billion in free cash flow and to repurchase roughly $4 billion of our shares.” - Paypal Q1 2023 Earnings Call

Paypal CEO's "unusual" $2 million stock purchase:

Conclusion

The analysis of PayPal indicates a positive outlook for the company based on several key factors.

Firstly, the forecasted growth in revenue, earnings per share (EPS), and free cash flow suggests a promising future for the company.

There’s also a good probability of multiple expansion when market sentiment improves considering that $PYPL P/E and P/FCF are at all time lows, P/E is very far from all time and 5-year averages and trading at a large discount compared to peers like $V, $MA, $AAPL and $SQ.

Also, Elliot Management, a prominent activist investor, has taken a stake in PayPal. Elliot's involvement brings expertise in driving operational improvements, enhancing shareholder value, and challenging strategic decisions. This partnership has the potential to unlock additional value and drive positive changes within PayPal.

PayPal offers an appealing investment opportunity for long-term investors, characterized by the potential for significant upside. This potential upside is driven by two key factors: earnings growth and multiple expansion.

In my opinion, Paypal is a:

• “Reasonable Buy” at $79 and below.

• “Good Buy” at the current share price (~$62) and below.

• “Strong Buy” at $40 and below.

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