Market Capitalization: $66.2B
Enterprise Value: $63.1B
Price: $64.72 (8/9/24)
What the Company Does
PayPal is a leading payment processor facilitating transactions for nearly 400 million consumer accounts and 35 million merchants in more than 200 markets around the world. PayPal primarily generates revenues by charging volume-based fees for completing transactions on behalf of their customers but also earns interest on consumer credit products and customer balances. The company processed 25 billion transactions worth $1.5 trillion in 2023, with 29% of this volume coming from PayPal’s legacy branded business, 35% from unbranded (i.e. not PayPal) card processing, 26% from peer-to-peer (P2P) transactions, and the balance coming from other merchant services and eBay.
Why We Own It
PayPal is a high-quality business with a new management team, strong growth prospects and a compelling valuation. Alex Chriss started as CEO in September of 2023 and formerly led Intuit’s small business group, where he grew customers and revenues at annual rates of 20% and 23%, respectively. He is now taking the same customer-first approach to PayPal’s massive installed base in an effort to improve the customer experience and also reduce waste. New products like Fastlane improve the user checkout experience and purchase conversion, while unbranded efforts are also starting to see a profitability boost. P2P transaction app Venmo has significant growth potential too, with only 60 million users and incremental revenue potential from the Venmo debit card. The team is seeing early signs of success, causing the company to increase its guidance for full-year sales and earnings in the Q2 report on the heels of the highest transaction margin dollar growth rate in three years. At a macro level, the company’s ecommerce focus is desirable since roughly 20% of retail sales occur online currently; with the ecommerce market expected to grow at a compound annual growth rate of 8% over the next four years to a nearly $8 trillion market by the end of 2027, PYPL can provide strong top-line growth simply by holding market share.
Despite the robust profitability, and many avenues for potential growth, shares currently trade at a forward (FY24) EV/EBITDA multiple of 9.8x, or a nearly 43% discount to peers (SQ, MA, V, FI, FIS, ADYEN NA, GPN).
How Management Allocates Capital
With more cash than debt, a highly cash-generative business model, and an aligned management team, the company plans on spending all $6B of this year’s guided free cash flow to repurchase stock, or approximately 9% of the company at our entry valuation. Management should be able to use cost takeouts to fund strategic internal investments, which may serve as a modest short-term headwind for operating margins but will hopefully translate into strong top-line and bottom-line gains in the future.