This is the first article in the new type/format, as announced in our latest post (Portfolio Update). In this article, we will focus on how PayPal executes on its key strategic areas, such as Branded Checkout, Braintree and Venmo, while comparing it with peers. Additionally, we conduct a DCF and sum of the parts valuation to assess whether the current price levels present a compelling opportunity. Please note that this article does not contain generic information. If you would like a better understanding of how PayPal operates, we suggest that you read our report that was written back in March 2022.
Contents:
Key information
Where does PayPal stand today?
Branded checkout
Braintree & unbranded processing
Venmo
Valuation
Conclusion
1. Key information
PayPal Holdings Inc. (“PayPal”, “Company”) market cap as of 18th of July stands at $83B and has a 52-week low of $58.95 and a 52-week high of $103.3, whereas it currently trades at $74.4.
PayPal trades at a TTM EV/EBITDA of 15.9x (5-Year average of 40x) and a TTM Price / Earnings of 31.5x (5-Year average of 54x).
Note: As of 18th of July 2023
PayPal was called a ‘pandemic darling’ and its performance over the COVID era has smashed the S&P 500, however, when management made its best possible effort to lose trust from investors (withdrawal of 750M active accounts target, consistent downward revision of forecasts, margin compression) and when the macro environment worsened, PayPal came down to earth. Let’s dive in to understand whether this is justified.
Source: Koyfin (affiliate link with a 15% discount)
To help you follow along this write-up, here is a breakdown of PayPal’s TPV in the respective payment platforms.
Source: Q4 2022, PayPal Investor Update
2. Where does PayPal stand today?
A picture or two, worth more than a 1,000 words.
Source: Company filings, StockOpine analysis
Following the acceleration in Active Accounts during the pandemic period, reaching 435M accounts (of which 35M are merchant accounts) in 2022 compared to 305M back in 2019, we observe the first real churn in Q1’23. This is of low concern as the focus shifted to engagement.
Acting CFO, Gabrielle Rabinovitch recently highlighted this (own emphasis).
“And so we've called out that we have about 190 million monthly active unique users on our platform.
So it's this very sizable number. And our monthly active unique users are actually 20 to 30x more valuable than an overall kind of average active account. And so what we're really focused is on growing that number because when we get someone to use us instead of 8x a month, 16x a month, the incrementality in our business is very, very significant. And so we think about like the best use of our marketing spend, the best use of our rewards programs. It's really about more deeply engaging our base today so that we increase the monthly active unique user base relative to just sort of growing active accounts.”
Looking at the Total Payment Transactions per Active user (“TPA”), the trend is clearly upwards and PayPal depicted a double-digit growth in all of the last 8 quarters showcasing the Company’s ability to execute on the engagement front. As one should have expected, a key driver of this trend is the high growth in unbranded processing and mainly Braintree (which we will discuss later).
As long as TPA grows we are happy, yet we do feel that active accounts remains a meaningful metric for the future success of the Company. It is a relevant number for its network strength and losing to Apple Pay (Statista reported 507M Apple Pay users for 2020 and presumably this number has increased) remains a risk.
Source: Company filings, StockOpine analysis
Another metric that gives a holistic view of performance is total payment volume (“TPV”). TPV has consistently increased over the last years and quarters with Venmo and Unbranded Processing being the key drivers of 2021 while in 2022 was all about Unbranded processing (~40% growth).
The inflection of the trend in Q1’23 (10% or 12% on FX neutral basis, “FXN”) is encouraging as there was a sequential TPV growth acceleration across all key areas with branded checkout increasing by +2 pts to 6.5% y/y, unbranded processing by +1 pt to 30% y/y and Venmo by +6 pts to 9% y/y.
Source: Q4 2022, PayPal Investor Update
All in all, the numbers show that despite the slowdown in 2022, PayPal does well and has various routes that can support its future growth. For the record, total revenue in 2022 grew from $25.4B to $27.5B or by 8.5% (10% on FX neutral basis) while the growth in ecommerce retail market stood at 7.1% in 2022 as per Insider Intelligence. Not too bad!
3. Branded checkout
Branded checkout is the bread and butter of PayPal but it is assumed by many as ‘dead’ and ‘unable to innovate’ losing share to companies like Apple.
This might hold true in certain regions but there are metrics / statistics that imply otherwise. For example, the below chart shared by the Company in its Q4’22 Investor update shows that PayPal’s digital wallet acceptance among the largest retailers in North America and Europe grew faster than any of its peers (in par with Google Pay), reaching 79% or 2.8x its next peer.
Source: Q4 2022, PayPal Investor Update
Furthermore, per Datanyze, PayPal is the #1 software in payment processing with a market share of 40.5%, while the next in line are Stripe with 20.5%, Shopify Pay with 13.7% and Amazon Pay with 4.9%. Although this comparison is not apples to apples it does speak of PayPal’s scale.
Management has repeatedly stated over time that despite losing market share in certain markets their overall position is on a ‘holding or gaining’ share.
PayPal’s Branded Checkout TPV which accounts for ~30% of its total TPV of ~$1.36T (in 2022) grew by 5% in 2022. This is not distant from the growth in ecommerce retail market of 7.1% mentioned earlier while the acceleration in Q1’23 to 6.5% y/y is promising.
The growth in the high margin branded checkout is far from over and we believe that the following quotes justify why (own emphasis).
“This isn't a zero-sum game between digital wallets. We are all feeding off of people manually entering their card. That's still 25% to 30% of the market. We're taking a lot of share from that as our other digital wallets.” Dan Schulman, President & CEO
“Well, I mean we definitely have goals to increase it in the double digits, and that is really about making sure that we are thinking about the next generation of Checkout, which is going to include AI, which is going to use the data that comes from the unbranded business to really create sort of the demographic of the consumer, which enables us to then target in a much better way and enables merchants to be able to target the consumer in a much better way” Peggy Alford, EVP Global Sales
The growth of unbranded helps in gathering important data and also deepens relationship with merchants. When implemented, checkout comes with the latest integration updating legacy integrations and creating better experiences for customers and merchants making it more relevant in the payment ecosystem.
Does it innovate?
With all the updates going on, such as reduced latency, passwordless authentication, rewards, Venmo and PayPal operability and package tracking refining the experience, engagement and thus results are expected to improve. As shown in the picture, there is a +33% payment conversion when PayPal is an option vs cards at checkout and +25% uplift on consumers to complete a purchase due to the payment method selected.
Source: Q1 2023, Investor Update
If you are not convinced yet, just note that in 2022 Dan Schulman CEO indicated that
"We had record platform availability in 2022, and we put out approximately 80,000 software releases.”
while in Q1’23 PayPal Investor Update the following was noted,
“In addition, PayPal is helping to power payments through Microsoft Teams. This allows many service-based small business owners like dietitians, cooking instructors, therapists or tutors to receive payment during a one-on-one appointment or in the class, directly in Microsoft Teams.”
Isn’t that an innovation?? One can argue otherwise but we are pretty happy with the efforts and progress.
PayPal Vs Apple Pay
This is a huge debate and no one can argue that Apple Pay is not catching up. It has the network, trust and reliability to compete on the branded business while it has one great advantage. Near-field communication (“NFC”) that enables contactless payments.
PayPal claims to have the highest acceptance at merchants, the highest conversion rates and the lowest loss rates for merchant partners while its add-on services like rewards, discounts, promotions, Buy Now, Pay Later (“BNPL”), package tracking enhance its offering. Nonetheless, they do admit that authentication (catching up with passwordless login, passkeys, biometrics) and NFC chip are where Apple stands out.
This relationship is competitive, yet, PayPal partnered with Apple Pay to tap on its Tap to Pay technology (NFC) and to allow consumers in US to use PayPal and Venmo on their Apple Wallet. Consumers come first and when ease of transaction comes to place this is a solid move. Why miss that customer when he/she wants to use his/her Apple device?