Unpacking PayPal: A Comprehensive Deep Dive into its Financials and Business (PART 1)
Welcome to Part 1 of the deep dive into PayPal Holdings, Inc. (PYPL 0.00%↑), where we’ll explore whether this payment giant is still an attractive investment opportunity after its significant drop in 2022.
In this analysis, I’ll provide a detailed business overview, examine PayPal's competitive advantages, and discuss key growth drivers. If you're curious about PayPal's stock performance, financials, and valuation, stay tuned for Part 2 by my colleague Adamos (StockOpine), who will break down the numbers in greater detail.
Investment Thesis
PayPal is one of the largest digital payment platforms globally, offering services for both consumers and merchants. With over 429 million active accounts, PayPal’s network is substantial, and it remains a key player in the ever-growing digital payment landscape. However, with growth rates slowing down and increased competition from companies like Stripe, Square, Adyen, Visa, and Mastercard, the question arises: Can PayPal stage a comeback, or has its best growth period passed?
Let’s dive deeper into the business model and current market position.
Business Overview
PayPal operates as a two-sided platform connecting consumers and merchants worldwide. It facilitates both online and in-person transactions, offering services like money transfers, payments for goods and services, and even cryptocurrency transactions. PayPal also owns Venmo, one of the most popular peer-to-peer payment apps in the U.S.
PayPal’s revenue model is largely transactional, where the company earns fixed and variable fees based on the payments processed. In addition to transaction fees, PayPal also earns through value-added services such as lending, interest on balances, and partnerships.
Competitive Advantage (Moat)
When evaluating PayPal’s moat, it is important to consider the factors that protect it from competitors. PayPal’s moat can be considered narrow but still effective. Here are the three key aspects of its moat:
Economies of Scale
PayPal benefits from its extensive merchant network and high transaction volume. While this gives it a competitive edge, it’s important to note that competitors like Visa, Mastercard, and Stripe are equally capable of achieving similar economies of scale.
Network Effect
With a massive user base of over 429 million active accounts, PayPal enjoys a significant network effect. The more people who use the platform, the more valuable it becomes for both merchants and consumers. However, this also creates pressure to keep growing, as financial industry is extremely competitive and pricing can be a deciding factor.Nonetheless, user experience is crucial and is influenced by factors like partnering with a trusted provider that offers strong customer support, higher authorization rates, and minimizes fraud risk. PayPal performs well on these metrics.
High Barriers to Entry
The payment industry requires extensive regulatory approval, technological investments, and robust fraud detection mechanisms. These factors make it difficult for new entrants to break into the industry and compete at PayPal's scale.
Fast Checkout Solutions: PayPal's "Fastlane" solution is designed to streamline the checkout experience without disrupting the retailer’s existing process, offering a seamless, fast payment option for customers. Unlike most guest checkout processes that may take over a retailer's design, Fastlane allows retailers to retain their customized checkout flow. This feature will likely attract merchants who value control over their checkout process while still offering a faster, more user-friendly option. As e-commerce continues to grow, retailers looking to optimize conversions are expected to adopt PayPal’s Fastlane, driving further transaction volume for PayPal. It’s no coincidence that even competitors like Adyen and Fiserv have partnered with PayPal to offer PayPal’s Fastlane to their merchants in the US.
Key Growth Drivers
Even though PayPal’s growth has slowed, there are still several potential catalysts that could drive future performance:
Expansion of Digital Payments
Digital payments are projected to reach $11.53 trillion in total transaction value in 2024, growing to $16.58 trillion by 2028. As digital wallets and platforms like PayPal, Venmo, and Cash App become even more popular, PayPal stands to benefit from this overall market growth.
Increased Adoption of Mobile Payments
With the rise of mobile-first consumers and the shift towards cashless economies, PayPal’s mobile app and Venmo are well-positioned to capture a larger share of the mobile payment market. This trend is particularly strong in emerging markets where mobile transactions are growing rapidly.
Growth in Value-Added Services
PayPal is expanding beyond transactions and into services like small business lending, cryptocurrency transactions, and interest-earning accounts. These value-added services could provide additional revenue streams as the company looks to diversify its income.
Financial Efficiency and Buybacks
PayPal’s financial strategy has been focused on maximizing shareholder value. The company is buying back shares aggressively, repurchasing over $4.4 billion worth of stock annually, which currently represents 7% of its market cap. Meanwhile, for FY24, the company projects share repurchases of approximately $6 billion. Buybacks reduces the number of outstanding shares and increases the value for remaining shareholders when done at the right price.
With a new CEO at the helm, PayPal is also cutting costs by reducing its workforce by 9% in 2023, focusing on efficiency and innovation, particularly in AI and financial technology.
Stay tuned for Part 2 of this deep dive, where Adamos (StockOpine) will cover PayPal’s financial performance, evaluate its KPIs and conclude with a stock valuation to help determine if it’s a buy.
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Written by Timothy Assi, a popular investor on eToro.
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Great job Timothy. Really enjoyed collaborating with you.