PayPal (PYPL) is a fintech company that has been at the forefront of the global digital payment revolution for more than 20 years leveraging technology to make financial services and commerce more convenient, affordable and secure. It enables digital and mobile payments on behalf of merchants and consumers empowering more than 350 million merchants and over 30 million consumers’ accounts across more than 200 markets. Founded in 1998, the company is headquartered in San Jose, California.
A proprietary payments platform
The goal of the company is to enable its merchants and consumers to manage and move their money anywhere globally, on any platform, with any device to send and receive payments. Through its platform, the company manages a two-sided proprietary global technology that connects merchants and consumers to facilitate the processing of payment transactions. PayPal’s payment platform brandscape includes PayPal, PayPal Credit, Braintree, Venmo, Xoom, iZettle and Hyperwallet products and services. It allows its customers to use their accounts for purchases and payments along with the transfer and withdrawal of funds. Additionally, the company also facilitates person-to-person (P2P) payment solutions through the PayPal website and mobile applications Venmo and Xoom, and personalises and simplifies shopping experiences for its customers through its Honey service.
Digital payments industry: growth and future outlook
Over the past years, consumers and businesses have rapidly adopted new payment methods and the rise in e-commerce has been an important growth driver for digital payments in the U.S. and around the globe. The U.S. digital market is likely to grow at an average of 20% over the next five years which should support PayPal’s growth prospects as one of the leading companies in the space. The company has had a 20.8% CAGR in its revenues over the last five years – higher than the global payments industry average.
Exhibit 1: U.S. digital market penetration in the next five years
Source: PayPal Investor Presentation, 2021
How does the company earn revenues?
PayPal’s revenues are classified into two broad categories:
Transaction revenues
The company earns revenues primarily by charging a fee for completing payment transactions for its customers and other payment-related services that are typically based on the volume of activity processed on the payments platform. It does not charge its customers to fund or withdraw from their account, however, they earn revenues from consumers on fees charged for foreign currency conversion and instant transfers from their PayPal or Venmo account to their debit card or bank account, along with revenues earned from interest and fees from its credit products.
Revenues from other value-added services
This primarily includes revenues earned through partnerships, merchant and customer credit products, referral fees, subscription fees, gateway services and other services provided to the merchants and customers.
Exhibit 2: Full-year net revenues of the company (USD million)
Source: PayPal Annual Report, FY 2020-21
Increased customer engagement on the platform and massive growth in active accounts seen during the pandemic
The company has grown rapidly over the years and is constantly adding value for its customers. The COVID-19 pandemic has impacted consumer behaviour, catalysing an accelerated shift towards e-commerce and online purchases from traditional in-store shopping. This shift towards e-commerce largely benefitted the company, which experienced significant growth in active accounts. This led to a growth in revenues during the pandemic in 2020 (21% year-on-year revenue growth) along with increased customer engagement seen during the pandemic (Exhibit 3 & 4).
Exhibit 3: Total active accounts at the end of 2020
Source: PayPal Annual Report, FY2020-21
Exhibit 4: Customer engagement on the platform until 2020
Source: PayPal Annual Report, FY 2020-21
The road to $50 billion-plus revenues by 2025
PayPal’s revenue grew by a CAGR of 17.9% over the past three fiscal years. During the latest quarter, revenues grew 19% year-on-year, of which transaction revenues grew 17% driven by Braintree acceleration as travel began to return and other value-added services revenue increased by 40% driven by strengthening credit performance in Q2 2021. The company aims to touch the $50 billion mark in revenues by 2025 growing at a CAGR of 20% in the next five years. (Exhibit 5)
Exhibit 5: Quarterly revenues (USD billion)
Source: PayPal Q2 Earnings Report, 2021
Exhibit 6: Revenue growth over the next five years
Source: PayPal Investor Presentation, 2021
Total payment volume of $1.1 trillion over the year largely contributed by P2P volumes
The total payment volumes (TPV) which refer to the value of payments successfully completed on the payment platform or enabled by PayPal via a partner payment solution crossed $1.1 trillion in the last 12 months and grew by 36% in the last quarter. The P2P volumes, which includes PayPal, Venmo and Xoom increased by 41% to $90 billion and represented 29% to the TPV at the end of Q2 2021 of which Venmo volume increased by 58% to $58 billion in the same period. The TPV is likely to grow at a CAGR of 25% to $2.8 trillion over the next five years. (Exhibit 9)
Exhibit 7: Total Payment Volume (TPV) (USD billion)
Source: PayPal Q2 Earnings Report, 2021
PayPal surpasses a whopping 400 million active accounts at the end of 1H 2021
At the end of Q2 2021, the company surpassed an impressive 400 million active accounts – up 16% including 32 million merchant accounts – and added 11.4 million active accounts in Q2 2021 with strength across PayPal, Venmo and Honey wallets. The company has massive expansion plans in terms of active accounts and is likely to grow at a CAGR of 15% to 750 million active accounts in the next five years (Exhibit 9).
Exhibit 8: PayPal’s total active accounts (million)
Source: PayPal Q2 Earnings Report, 2021
Exhibit 9: Active accounts and total payments volume projections for next five years
Source: PayPal Investor Presentation, 2021
Strong balance sheet and cashflow statement
The company has a strong balance sheet with net debt of $3.2 billion and a free cash flow (FCF) of $1.06 billion as of the end of 1H 2021 (Exhibit 10). This implies that in the first half of 2021, PayPal generated 21 cents of FCF for every $1 of revenue generated. The FCF was lower in Q2 2021 largely driven by cash taxes, capital expenditures and a stock repurchase in 1H 2021. The return on capital (ROC) is strong at 16.2%. In Q2 2021, the company returned $200 million in capital to its shareholders by repurchasing 765,000 shares at an average price of $261.82 per share.
Exhibit 10: Quarterly free cash flows (FCF) (USD million)
Source: PayPal Q2 Earnings Report, 2021
Exhibit 11: The company’s capital allocation (USD billion)
Source: PayPal Q2 Earnings Report, 2021
Sustainable growth in earnings per share (EPS)
On the back of improved growth in the company’s revenues and margins, EPS grew at a CAGR of 26.9% over the past three fiscal years, outpacing its revenue growth. Going forward, the EPS forecasts are likely to increase by 21.6% to $4.72 in 2021 and increase by 24.7% to $5.88 for FY2022, thus growing at an average CAGR of 22% over the next five years.
Exhibit 12: EPS growth rate for the next five years
Source: PayPal Investor Presentation, 2021
A total addressable market (TAM) of $110 trillion over the next five years
The company has an enormous total addressable market (TAM) of around $110 trillion. PayPal’s introduction of new products and services are likely to allow the company to serve a bigger piece of the TAM.
Exhibit 13: PayPal’s total addressable market
Source: PayPal Investor Presentation, 2021
New product offerings and buy now pay later (BNPL)
In 2020, PayPal introduced several new products which have continued in the current year and going forward in the coming years. The new products that are likely to drive growth today include cryptocurrency, in-store and BNPL offerings. The company saw an increase in transactions and total payment volume (TPV) after the adoption of BNPL by the company. Over 40% of the U.S. customers returned to complete more than two transactions with BNPL options. An impressive 50% of the company’s cryptocurrency holders login to PayPal every day, however, the direct deposit consumers generated greater customer value annually.
Exhibit 14: Increase in weekly transactions post-BNPL
Source: PayPal Investor Presentation, 2021
Aggressive expansions and global acquisitions
PayPal has made several partnerships and acquisitions around the world over the years which gives them an edge over its competitors. For example, the acquisition of GoPay in China gives the company the ownership of a domestic payments license. The company’s partnership with Mercado Libre (MELI) gives the company access to South and Central American and Mexican markets. The company’s recent acquisition of the Japanese BNPL services platform Paidy is likely to increase PayPal’s market share in Japan and bolster its capabilities, distribution and its presence in the domestic payments market in Japan.
Exhibit 15: PayPal’s expansions so far globally
Source: PayPal Investor Presentation, 2021
Competitive advantage
The company enjoys a reasonably competitive advantage over its peers.
Two-sided network: enables the company to offer unique end-to-end product experiences while gaining valuable insights into customer behaviour. Additionally, the platform provides digital, mobile and in-store (point-of-sale) transactions along with being both technology and platform agnostic.
On the consumer side, PayPal enables consumers to have a safe exchange of funds with merchants using various funding sources. The company’s PayPal, Venmo and Xoom products make it safe and simple for family and friends to transfer funds to each other.
On the merchant side, the company offers merchants an end-to-end payments solution that provides authorisation and settlement capabilities along with instant access to funds. The company also helps merchants to manage risk and engage in cross-border transactions.
Increased Brand-value
The company has built and strengthened well-recognised and trusted brands by leveraging big data, analytics and improved technologies which have helped the company to attract more customers through its innovative product offerings. As per the recent survey by the company, 54% of the customers are more willing to buy when a business accepts PayPal – which benefits the merchants on the platform – and 59% of PayPal users have cancelled the transaction because PayPal was not available at checkout. So, the brand is a result of the company’s significant investments in marketing along with the safety and security of its customers’ transactions. Customers trust the company to keep their information secure and minimise the risk of fraud.
Peer Comparison
PayPal is a much bigger and more profitable fintech company than its immediate competitor Square (SQ) both in terms of its revenues as well as gross profits (Graph below). The growth in revenues as well as gross profits for the company have been quite significant over the last five years and maintains its consistent and steady growth targets.
The market capitalisation of the company is about $305 billion as compared to Square’s market cap. of $108 billion. PayPal’s Venmo is the largest player in the person-to-person (P2P) space with almost 58% of U.S. P2P mobile payment users likely to be using the platform by the end of 2021. Square’s Cash App is the direct competitor of Venmo in the P2P payments’ app space.
Exhibit 16: Revenues and gross profits: PayPal vs. Square
Source: Data taken from company financials, 2021
Valuations
The stock has provided returns of around 23% to its investors over the year and looks attractive at current valuations, where PayPal is trading at a trailing P/E and forward P/E, which is lower than its immediate competitor Square in the same business and makes it a good long-term investment for investors. There have been several analyst ratings on the stock recently with over 30 analysts (Exhibit 18) maintaining a buy rating on the stock at current levels of $255 with an average price target of $330 on a medium to long-term horizon.
Exhibit 17: Valuations: PayPal vs. Square
Source: Data taken from company financials, 2021
Risks to business
The fintech industry is getting increasingly crowded with many new players and large tech giants like Apple Pay and Google Pay growing rapidly in the digital wallets space. In the P2P space, PayPal’s Venmo faces competition from Square.
Additionally, PayPal does not operate its own network but utilizes the ACH network and the debit/credit card networks operated by MasterCard and Visa. This can be a potential risk to PayPal if these companies offer their eWallet services.
Exhibit 18: Analysts ratings of PayPal as of October 2021
Final thoughts
PayPal is a leading fintech company that benefits from the secular growth trend in the digital payments business globally. The company is well-positioned in large and attractive markets with impressive growth plans going forward and enjoys a strong competitive advantage over its peers. The company with its impressive growth history is showing no signs of slowing down, thus making its 2025 growth targets quite achievable.
