PayPal Holdings Inc Fundamental Analysis
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PayPal Holdings Inc
Last Updated: 6 June 2023
NASDAQ: PYPL
GICS Sector: Financial Services
Sub-Industry: Credit Services
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Table of Contents
You can download a summary of PayPal Holdings Inc's fundamental analysis in PDF here.
Management
CEO: Dan Schulman
Tenure: 7.9 years
PayPal Holdings, Inc's management team has an average tenure of 1.7 years. It is not considered experienced.
Source of Revenue
PayPal Holdings, Inc. operates a technology platform that enables digital payments for merchants and consumers worldwide.
The company offers payment solutions under various names such as PayPal, PayPal Credit, Braintree, Venmo, Xoom, PayPal Zettle, Hyperwallet, PayPal Honey, and Paidy. Its payments platform allows consumers to send and receive payments in around 200 markets and 150 currencies. They can also withdraw funds to their bank accounts in 56 currencies and hold balances in their PayPal accounts in 25 currencies.
PayPal Holdings primarily generates revenue through fees charged for completing payment transactions and providing other payment-related services to customers. These fees are usually based on the amount of activity processed on the payments platform. The company also earns revenue by charging fees for foreign currency conversions, instant transfers from PayPal or Venmo accounts to bank accounts or debit cards and facilitating the buying and selling of cryptocurrencies. However, PayPal generally does not impose fees on customers for funding or withdrawing from their accounts.
Additionally, the company generates revenue through various value-added services, including partnerships, interest and fees from merchant and consumer credit products, interest earned on specific assets linked to customer balances, referral fees, subscription fees, and gateway services.
Merchant value proposition
PayPal collaborates with merchants to enhance their business growth by offering global reach and digital checkout solutions. The company provides services such as alternative payment methods, fraud prevention, proprietary protection programs, and data analytics tools to attract customers and increase sales conversion. Its platform allows merchants of all sizes to securely accept payments across platforms and devices, offering digital checkout online and in-store.
Merchants can accept a wide range of payments, including PayPal and Venmo digital wallets, credit/debit cards, and local payment methods. The company focuses on simplifying the shopping experience, facilitating exchanges and returns, and driving consumer engagement to boost conversion rates.
Moreover, PayPal offers merchant finance options, such as PayPal Working Capital and PayPal Business Loan, providing loans or cash advances based on payment volume. These services deepen its relationship with existing merchants and attract new ones by offering accessible capital.
Revenue primarily comes from fees charged for payment transactions and services provided to merchants. Additionally, interest and fees earned on merchant loans contribute to PayPal's revenue streams.
Consumer value proposition
PayPal offers a digital wallet that allows consumers to send payments to merchants using various funding sources such as bank accounts, PayPal or Venmo balances, consumer credit products, credit/debit cards, cryptocurrencies, and stored value products.
The company also provides peer-to-peer (P2P) payment solutions through PayPal, Venmo, and Xoom. This includes both domestic and international transfers, with Venmo being a leading mobile app for money transfers and purchases. The Xoom service enables secure and cost-effective international money transfers. P2P payments not only engage customers but also serve as an acquisition channel, driving organic growth.
PayPal offers credit products at checkout in select markets, including buy now, pay later options with no interest or late fees in many regions.
Revenue is generated from fees for foreign currency conversion, instant transfers, and facilitating cryptocurrency transactions, as well as interest and fees from credit products and miscellaneous fees.
PayPal operates as one segment and has one reportable segment. However, the company's revenues are classified into the following two categories:
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Transaction revenues: Net transaction fees charged to merchants and consumers based on the total payment volume (TPV*) completed on the PayPal payments platform. Growth in TPV is directly impacted by the number of payment transactions that PayPal enables. PayPal earns additional fees from merchants and consumers: 1) on transactions involving currency conversion, 2) to facilitate instant transfers of funds from PayPal or Venmo accounts to bank accounts or debit cards, 3) to facilitate the purchase and sale of cryptocurrencies, 4) as contractual compensation from sellers that violate PayPal contractual terms (e.g., through fraud or counterfeiting), and 5) other miscellaneous fees.
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Revenues from other value-added services: Net revenues derived primarily from partnerships, referral fees, subscription fees, gateway fees, and other services PayPal provides to merchants and consumers. The company also earns revenues from interest and fees earned on its portfolio of loans receivable and interest earned on certain assets underlying customer balances.
TPV represents the value of payments, net of payment reversals, completed on the payments platform or enabled by PayPal via a partner payment solution, excluding gateway-exclusive transactions.
PayPal Holdings Inc Revenue Category FY2022
PayPal Holdings Inc Revenue Geographic Breakdown FY2022
PayPal Holdings Inc Economic Moat
PayPal Holdings Inc Economic Moat
Economic Moat: Narrow
There are many ways to identify PayPal Holdings Inc’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of PayPal Holdings Inc. Please check my summary to understand more about the economic moat.
Performance Checklist
Is PayPal Holdings Inc’s revenue growing YoY for the past 5 years consistently? Yes.
Is the net income growing YoY for the past 5 years consistently? Inconsistent.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? No.
Is the EPS growing for the past 5 years? Inconsistent.
PayPal Holdings Inc Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Generally in an uptrend.
PayPal Holdings Inc FCF per Share
Management Effectiveness
Is PayPal Holdings Inc’s ROE consistently at 12%-15% YoY for the past 5 years? Inconsistent.
PayPal Holdings Inc Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? Inconsistent.
PayPal Holdings Inc Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is decreasing, which is something that an investor would be pleased to see.
PayPal Holdings Inc Shares Outstanding (Million Shares)
PayPal Holdings Inc Financial Health
PayPal Holdings Inc Financial Health (USD Million)
Current Ratio: 1.3 (pass my requirement of >1.0)
Debt-to-EBITA: 1.9 (pass my requirement of <3.0)
Interest Coverage: 13.4 (pass my requirement of >3.0)
Debt Servicing Ratio: 5.2% (pass my requirement of <30.0%)
Dividend
Current Dividend yield: PayPal Holdings Inc does not have a record of paying a dividend.
PayPal Holdings Inc Intrinsic Valuation
Estimated intrinsic value: $97.26
Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$5,000M
Projected growth rate: 10% - 12%
Beta: 1.35
Discount rate: 8.8%
Margin of safety: 40% (Uncertainty: Mid)
Price range after the margin of safety: <$59.00
Date of calculation: 6 June 2023
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
PayPal Holdings Inc Intrinsic Valuation
PayPal Holdings Inc Relative Valuation
PayPal Holdings Inc EV-to-EBITDA vs its peers
PayPal Holdings Inc Price-Earnings Ratio vs its peers
PayPal Holdings Inc Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
One of the main concerns is the risk of cyberattacks and security vulnerabilities. The methods used to gain unauthorized access to systems and information, disrupt services, exploit weaknesses, or sabotage systems are constantly evolving. These attacks may go unnoticed until after they have been launched. Unauthorized individuals attempt to access systems by hacking or deceiving users into revealing sensitive information. This information can then be used to gain access to confidential data and conduct fraudulent actions.
Cybersecurity threats, such as cyberattacks, ransomware, phishing, and malware, are becoming more sophisticated and can compromise both data and systems. PayPal is particularly susceptible to being targeted due to its reputation, brand recognition, and the type of data it manages. Breaches affecting companies acquired by PayPal or its partners could have similar negative effects. If payment card information is breached, PayPal may be held responsible by payment card issuing banks. Cybersecurity breaches can lead to significant costs, legal problems, damage to reputation, and reduced customer confidence. Insurance coverage may not fully compensate for all the losses caused by security breaches.
The company also faces substantial and increasingly intense competition in the global payments industry. Innovation, evolving technologies, and customer preferences play a crucial role in shaping the industry. PayPal competes with various companies, some of which may be larger, more established, or have greater resources, while others may be smaller and more agile. These competitors may offer various products, services, or pricing strategies.
In addition to the competition, unfavourable global and regional economic conditions, such as disruptions in the banking system or financial markets, credit market tightening, market volatility, high unemployment, economic downturns, inflationary pressures, and reduced consumer confidence and activity, could significantly affect the demand for PayPal's products and services. This could result in a decrease in the volume and size of transactions on the PayPal payments platform. Furthermore, difficulties in accessing capital markets due to market volatility or regulatory requirements may impact its liquidity.
Lastly, as part of PayPal's business strategy, the company actively considers and evaluates several types of strategic transactions, such as business combinations, acquisitions, and divestitures of businesses. These transactions could have a significant impact on the company's financial condition and results. However, there is no guarantee of success in identifying, negotiating, and integrating these opportunities. Strategic transactions come with challenges and risks, including the integration of new employees, systems, and operations, as well as potential issues related to data security and regulatory compliance. The expected benefits of these transactions may not materialize, and they could potentially harm PayPal's business.
Summary for PayPal Holdings Inc
PayPal has gained a strong competitive edge by building a network of merchants and consumers during the early days of e-commerce. This advantage has been further reinforced by the growing popularity of electronic payments and the rapid expansion of online shopping, which was accelerated even more by the COVID-19 pandemic.
The network effect is widely recognized as a significant barrier to entry, and PayPal benefits from it. As more users join the platform, its value increases, creating a positive cycle that reinforces PayPal's dominance in the market. The larger the user base, the more appealing it becomes for individuals and businesses to use PayPal for transactions.
However, PayPal's market position is not dominant enough to dictate terms to other players. Nevertheless, it is expected to remain a preferred partner in the online realm due to the favourable attributes of its platform, such as convenience and security.
One notable aspect of PayPal's payment processing is its scalability. The platform incurs minimal additional costs as it handles more transactions, making it highly efficient. In the acquiring industry, PayPal stands out as a prominent leader, particularly in the e-commerce sector where it holds a significant position.
Unlike traditional acquirers, PayPal operates as a unique two-sided platform, establishing relationships with both merchants and consumers. This approach offers significant advantages, including the ability to combat fraud effectively. By having access to information from both sides of the transaction, PayPal gains a valuable advantage in ensuring secure payments, which was crucial during the early days of the Internet and remains a significant concern. Additionally, PayPal's user-friendly interface contributes to higher conversion rates in online transactions, benefiting both consumers and merchants. These factors contribute to the generation of a network effect.
PayPal also possesses significant intangible assets. It is a widely recognized and trusted brand in the online payment industry, giving it a competitive advantage over newer entrants. Its established reputation and strong brand recognition inspire confidence among users, attracting more customers to its platform.
As a financial services company, PayPal operates in a highly regulated environment. Compliance with regulations requires substantial resources, expertise, and licenses, which can function as a barrier to entry. Newcomers face challenges in navigating the regulatory landscape, further providing PayPal with a competitive advantage.
In conclusion, PayPal has successfully established a strong competitive position in the online payment industry through various key advantages. Its network effect, scalability in payment processing, unique two-sided platform, trusted brand recognition, and compliance with regulations all contribute to its competitive edge. Considering these factors, it is evident that PayPal possesses a narrow economic moat, making it a formidable player in the market.
PayPal Holdings Inc has shown consistent revenue growth year over year for the past five years, indicating a strong performance in generating income. However, its net income growth has been inconsistent during this period, suggesting some challenges in managing expenses and maximizing profitability. The cash flow from operating activities has also displayed an inconsistent trend over the past five years. On a positive note, PayPal has maintained positive free cash flow for the past five years, highlighting its ability to generate excess cash after accounting for necessary investments. Unfortunately, the gross margin percentage has not been growing over the same period, and it falls below the industry average. This suggests that PayPal's profitability at the gross level is not as strong as its competitors, indicating potential challenges in managing costs or pricing strategies.
The company's ROE has displayed inconsistency over the past five years, fluctuating below or above the 12%-15% range. It is worth noting that the ROE is slightly below the industry average, suggesting that PayPal's efficiency in utilizing shareholder equity may be slightly lagging behind its competitors. On the other hand, the ROIC has also been inconsistent over the same period, deviating from the 12%-15% range. However, the ROIC has consistently exceeded the WACC, implying that PayPal's capital investments have been generating returns higher than the cost of capital.
PayPal Holdings Inc demonstrates a healthy financial position based on several key indicators. The company's current ratio stands at 1.3, comfortably surpassing my minimum requirement of 1.0. This suggests that PayPal possesses sufficient current assets to cover its short-term liabilities, indicating a strong ability to meet its immediate financial obligations. Moreover, the debt-to-EBITDA ratio of 1.9 indicates that PayPal has a manageable level of debt relative to its earnings before interest, taxes, depreciation, and amortization. Additionally, PayPal's interest coverage ratio of 13.4 exceeds my requirement of 3.0, implying that the company generates ample operating profits to cover its interest expenses. Lastly, the debt servicing ratio of 5.2% falls below my threshold of 30.0%, affirming that PayPal's debt obligations represent a relatively small portion of its overall cash flow.
Investing in PayPal may present certain challenges and uncertainties. While the company enjoys a narrow economic moat, meaning it has a competitive advantage, its performance and capital allocation have been unsatisfactory, as indicated by inconsistent growth and below-average margins. This inconsistency raises concerns about the company's ability to generate consistent returns for shareholders. Given these factors, it becomes crucial to approach an investment in PayPal with caution and demand a margin of safety of at least 40%. This margin of safety helps mitigate risks associated with the company's uncertain performance and provides a buffer in case of unforeseen challenges. Therefore, potential investors should carefully evaluate the company's financial health and growth prospects, ensuring they have a sufficient margin of safety to account for the uncertainties associated with investing in PayPal.
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