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PayPal: Is this market leader on sale?

Opdateret: 22. feb.


PayPal is the clear global market leader among online payment processing software technology companies. Yet, PayPal stocks have tumbled since reaching their all-time high above $300 in the summer of 2021. Is this decrease in share price justified, or does it mean that PayPal stocks are now cheap? This is what I will investigate in this analysis.


This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.


For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in PayPal or any of its direct competitors. If you are interested in copying my portfolio or viewing the stocks I currently own, you can find instructions on how to do so here. I have no personal stake in PayPal, which means it should not be difficult to maintain an unbiased analysis. If you want to purchase shares or fractional shares of PayPal, you can do so through eToro. eToro is very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started.



PayPal was founded in 1998 under the name Cognify by Max Levchin, Luke Nosek, and Peter Thiel. It merged with x.com, founded by Elon Musk, in 2000. It first went public in 2002 but became a wholly-owned subsidiary of eBay in 2003. In 2015, eBay spun off PayPal, and it went public as an independent company once again. PayPal provides payment solutions that enable customers to connect, transact, and send and receive payments online or in person. PayPal also owns other brands, such as Venmo and Paidy. PayPal's customers include both merchants and consumers. As of the end of 2023, PayPal had 426 million active accounts, with 391 million accounts belonging to consumers and 35 million accounts belonging to merchants. These accounts are spread across more than 200 countries. PayPal generates revenue by charging fees for processing payment transactions, converting foreign currencies, enabling instant transfers from customers' PayPal or Venmo accounts to their bank accounts or debit cards, and facilitating the buying and selling of cryptocurrencies. PayPal is the clear market leader, and the total payment volume through PayPal in 2023 was $1,53 trillion, through 25,0 billion payment transactions. Merchants choose PayPal because it offers global reach and powers all aspects of digital checkout. Consumers choose PayPal because it offers a digital wallet that enables them to send payments to merchants more securely using a variety of funding sources. According to Infegy, PayPal is considered one of the most trusted brands in the world, ranking 4th. Being one of the most trusted brands in the world showcases the strength of the PayPal brand, which is what gives PayPal its moat.


The CEO is Alex Chriss. He joined PayPal as CEO in 2023. Prior to joining PayPal, Alex held various roles of increasing responsibility at Intuit for 20 years. He holds a Bachelor of Arts degree in Economics from Tufts University. He also possesses an entrepreneurial spirit, having successfully founded and sold two start-ups before joining Intuit. When he was appointed as the CEO of PayPal, he was described as a seasoned and highly successful business leader with extensive experience in technology and product leadership. This description appears to be accurate when examining his track record. During his tenure leading Intuit's Small Business segment, he achieved a compound annual growth rate of 20% and 23% for its customers and revenues, respectively. He was also responsible for successfully integrating the $12 billion acquisition of Mailchimp. Nonetheless, it will be the first time Alex Chriss will lead a company. While he may very well be successful, there will be some uncertainty regarding the leadership in PayPal until he has proven himself.


I believe that PayPal has a strong brand moat. However, there are some uncertainties regarding the management. Now, let us investigate the numbers to determine if PayPal meets our criteria for a strong competitive advantage. In case you want an explanation about what the numbers represent, you can refer to "MY STRATEGY" on the website.


The first number we will investigate is the return on invested capital, also known as ROIC. We want to review a 10-year history, with all figures exceeding 10% for each year. As PayPal went public in 2015, I do not have numbers before 2015. PayPal has consistently achieved a solid return on invested capital (ROIC), with only three out of nine years falling below the required 10% threshold. However, two of the years are the first two years, and they were close to reaching 10%. PayPal did not achieve the required 10% in 2022. However, it was a challenging year for most companies due to macroeconomic factors. Overall, I am satisfied with PayPal's return on invested capital (ROIC), but I am not impressed. I would like to see PayPal return to the numbers we saw in 2020 and 2021 moving forward. Fortunately, the numbers from 2023 indicate that PayPal is on the right path.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it moving forward. As you are accustomed to seeing numbers in percentage form, I have decided to share both the actual numbers and the year-over-year percentage growth. PayPal has managed to steadily grow its equity in most years, with only two out of nine years experiencing a decrease compared to the previous year. I will give PayPal a pass on a very challenging 2022. It is good to see that PayPal returned to growth in 2023, even though the numbers are still lower than in 2021. Hopefully, PayPal will reach a new all-time high in 2024.



Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that the margin provides a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Not surprisingly, PayPal has managed to deliver positive free cash flow in all nine years since its initial public offering (IPO). Free cash flow decreased in 2023, which is never nice to see. However, it is more concerning that the levered free cash flow margin reached its lowest level since the IPO in 2023. I would like to see the levered free cash flow margin increasing moving forward. The high free cash flow yield indicates that PayPal is currently undervalued. However, we will discuss this further in the analysis.



Another important aspect to investigate is the level of debt, specifically whether a business has manageable debt that can be paid off within a period of 3 years. We achieve this by dividing the total long-term debt by earnings. Upon calculating on PayPal, I can see that PayPal has 2,28 years of earnings in debt. It is below the three-year threshold. Therefore, debt is not a concern for me if I choose to invest in PayPal.



Based on my findings so far, I believe that PayPal is a reputable company. However, no investments are without risk, and PayPal has its own set of risks as well. One risk is macroeconomics. If we experience a prolonged recession, it is likely that online shopping will decrease. In its annual report, PayPal mentions that macroeconomic developments could have a material adverse impact on the demand for their products and services. This impact may include a reduction in the volume and size of transactions on their payments platform. Lower volume and fewer transactions will lead to a decrease in fees and other charges that PayPal relies on. Another risk is competition. In its annual report, PayPal highlights competition as a risk. They mention that the global payments industry is highly competitive, and competition may intensify as new competitors emerge. Some of the new competitors could include traditional banks, while others are smaller or younger companies that may be more agile in responding to regulatory, technological changes, and customer preferences. PayPal is also facing competition from large tech companies such as Google and Apple, which are promoting their payment solutions. PayPal is currently losing market share to competitors, and if they don't reverse this trend, it could have a significant impact on PayPal. Finally, regulations are a risk that needs to be monitored. In their annual report, PayPal mentions that their business is subject to extensive government regulations and oversight. PayPal mentions that regulations globally are increasingly exercising regulatory authority, oversight, and enforcement in a manner that impacts their business. These stringent regulations also make it difficult for a company like PayPal to innovate compared to companies in other sectors. Furthermore, we have probably only seen the beginning of regulations in the cryptocurrency market.


There are also numerous advantages if you choose to invest in PayPal. One is advertising. PayPal has introduced some new innovations that will drive long-term growth. Two of these innovations can be grouped as advertisement. The first feature is smart receipts. When consumers shop with PayPal, they will receive a receipt that allows them to track their purchases. PayPal wants to use AI to predict what customers may want to buy next from that merchant. As a result, merchants will now be able to include a personalized recommendation along with a cashback reward offer on the receipt. As 45% of all PayPal customers open their receipts, this has huge potential. The other is the Advanced Offers Platform. PayPal will utilize unique customer insights to develop a dynamic, truly personalized advanced offers platform, enabling merchants to target customers based on their actual purchase history across the internet. These two innovations mean that PayPal is entering the high-margin advertising business. PayPal Cashback Card and Venmo Debit Card. The average revenue per account for individuals who adopt the PayPal Cashback Mastercard is approximately five times higher than that of the average checkout-only account. Today, only about 2% of active accounts have the card in their wallet, and PayPal plans to increase the penetration of the PayPal cashback card by redesigning its app and creating improved frictionless onboarding paths. PayPal is also focused on driving the adoption of the Venmo debit card because Venmo debit card holders are among their most engaged accounts and drive six times the incremental revenue compared to that of a P2P-only customer. Today, approximately 6% of their active Venmo customers have a Venmo debit card. Growing branded checkout. Branded checkout is a high-margin business and has grown slower than its unbranded card processing business. Management believes that branded checkout is a critical part of PayPal's value proposition and is focused on accelerating growth in branded checkout. Management aims to achieve this by ensuring the best checkout experience for every consumer on every merchant, every time. This will be done by creating more simplicity and consistency with the goal of optimizing presentation, increasing speed, and minimizing friction across all major checkout flows.



Now it is time to calculate the share price of PayPal. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,84, which is from 2023. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by an average of 19% in the next 5 years, but 15% is the highest I use. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on PayPal's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $115,20. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy PayPal at a price of $57,60 (or lower, obviously) if we use the Margin of Safety price.


The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 4.316, and capital expenditures were 660. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 462 in our calculations. The tax provision was 1.165. We have 1.072 outstanding shares. Hence, the calculation will be as follows: (4.316 – 462 + 1.165) / 1.072 x 10 = $46,82 in Ten Cap price.


The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With PayPal's free cash flow per share at $3,91 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $61,72.


I believe that PayPal is an interesting company. There are uncertainties surrounding management, and PayPal is likely to face some short-term challenges due to macroeconomic factors. Competition poses long-term risks as new competitors enter the market, but it is worth remembering that PayPal has a head start. Regulations will always pose a risk for PayPal, but thus far, they have been able to successfully navigate through regulations in various markets. I'm intrigued by the new innovations that management has introduced to drive long-term growth. If PayPal managed to leverage its data and AI to successfully enter the advertising business, it could significantly increase its profitability in the future due to the high-margin nature of the industry. I also believe that PayPal has the opportunity to increase the penetration rates for both the PayPal Cashback Card and Venmo Debit Card, which should lead to increased spending on their platforms. Finally, focusing on its high-margin branded checkout business will not only improve profitability but may also prevent PayPal from losing market share as these new initiatives should make it easier for customers. If the new management can deliver on these innovations, PayPal is poised to become a more profitable business in the future. However, there is still uncertainty regarding whether management will be able to deliver. Nonetheless, I will buy shares if PayPal drops to the Ten Cap price of $46,82, and I may even buy a few shares at a higher price.


My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.


I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.


Some of the greatest investors in the world believe in karma, and in order to receive, you will have to give (Warren Buffett and Mohnish Pabrai are great examples). If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to Rolda Animal Rescue. It is an organization that is helping the animals in Ukraine, and they need all the help they can get. If you have a little to spare, please donate here. Even a little will make a huge difference to save these wonderful animals. Thank you.



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