I noticed that nobody had posted about it yet today, so I thought to myself, “Well, gotta fix that”.
Mainly because I would like to address the most widespread beliefs among the critics: PayPal has no moat and the competition is squeezing them.
THERE IS NO MOAT
People tend to naively overlook the fact that network effect-based moats are the strongest forms of competitive advantages, and that PayPal has 35 million-plus merchants and 400 million-plus customers. Customers join (and subsequently stick around) the network, because PayPal is still, to this day, perceived to be the most secure alternative for online payments (it is second only to Visa on the list of the most trusted financial services brands). For as long as customers will stick around, so merchants will, too, whether they like it or not.
COMPETITION IS SQUEEZING THEM
There is no single KPI indicating, as of yet, some sort of permanent business deterioration whatsoever. According to the “Q3 23 PayPal Earnings Release”, the revenue has been growing 8% at spot over the last 12 months, branded checkout TPV ~6%, and PSP2 TPV (unbranded processing) ~32%. This ain't a dying company, at all.
Some food for thought for the critics:
• In terms of market share, Apple Pay is clearly lagging behind, losing to PayPal in all segments (top 10K sites, top 100K sites, top 1M sites, and the entire web, really), which just goes to show how difficult it is for competitors to gain market share against PayPal the “Dinosaur”, even for the leader of the mobile-wallet market;
• Braintree’s aggressive land-grab strategy in the US likely contributed to the sharp deceleration in Adyen’s North America revenue growth. Adyen is about the same size as privately-held Stripe, based on publicly available information regarding their payments volume. Both are approximately twice the size of Braintree. I'd suggest you to tinker with the numbers to check out for yourself the impact that Braintree, a subsidiary with razor-thin margins, growing at a rate of over 30%, can have on the whole company's bottom line.
• While Zelle is bigger than Venmo in terms of TPV and has as much active users as Venmo, the latter is still the most commonly used peer-to-peer payment app, after PayPal itself. Venmo's stickiness or ability to retain and engage users is significant and should not be ignored.
TO THE MOON AND BACK
The stock has lost more than 80% from its historical peak due to its inability to meet investors' expectations regarding growth and profit margins, not because the quality of the business in itself is deteriorating.
The company has returned $5.4B to stockholders through share repurchases on a trailing 12-month basis, it currently offers an earnings yield of about 6%, and it has a new CEO which, in my opinion, is the perfect fit for the role. As a matter of fact, the only two things I didn't like about PayPal were the bonkers valuation and the management. And they are both gone now.
A QUICK VALUATION
In order to achieve a 10% annualized return with a required margin of safety of at least 50% and no reliance on multiple expansion, the company must consistently achieve a growth rate of 7%. Notably, the company's year-over-year quarterly growth has consistently met or exceeded this threshold without exception since 2014. Furthermore, the global payment processing industry has been growing at a CAGR in the double digits over the last decade and is expected to keep growing at similar rates throughout this decade.
The current price offers a favorable risk-reward balance in the most probable scenario, without relying on the most optimistic best-case scenarios needed to justify certain other stock valuations.
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