PayPal: Is It Time To Peak Again? – PayPal Holdings, Inc. (NASDAQ:PYPL) No ratings yet.

Overview & Introduction

We like PayPal’s (PYPL) exposure to the rapidly growing digital payments landscape, and believe it is positioned well to sustain mid-to-upper teens net revenue growth. We believe PayPal’s scale and mobile transaction trajectory can sustain a growing network effect. We believe investments in Braintree, Venmo, Xoom, and other recent acquisitions provide the platform from which PayPal can further adapt to digital change. Additionally, use of cash presents M&A optionality to inorganically expand the platform – for continued bolt-on acquisitions that support incremental use cases or larger transformative acquisitions

PayPal reported strong Q2FY19 results with revenue growth of 12% Y/Y to $4.31bn, while its adjusted earnings per share (EPS) rose 47% Y/Y to $0.86, after benefiting from gains in strategic investments. The strong top-line and bottom-line growth was driven by a rise in active accounts and user engagement

The company is working on an integration with MercadoLibre which includes PayPal’s integration into the South American online marketplace. PayPal is developing Uber Technologies’ digital wallet and integrating with the online bill-paying platform, Paymentus

We are optimistic about a strategic partnership with MercadoLibre generating significant value for PayPal. This payment giant has already completed a $750 million investment in the e-commerce company. With the investment, PayPal stands to gain a foothold with more than 500 million customers

PayPal’s partnership with Uber could also be huge. Uber’s gross bookings increased by 121% between 2016 and 2018. Uber is working on a digital wallet service. PayPal recently invested $500mn in Uber, which will allow the company to collaborate with the ridesharing company on its digital wallet service

Industry

Global eCommerce growth (ex-travel):

(Source: Source: Goldman Sachs Global Investment Research, Census Bureau, Euromonitor, IBGE, IPCA, AKIT, Japan METI, iResearch, NBS China)

We expect that global eCommerce growth in 2019 will decelerate to 20%, following three consecutive years of acceleration, even as the US sees an acceleration in growth driven by record retail store closures, faster shipping, and strengthening consumer spending. While US accelerations in the past have been a key determinant of Global growth, decelerations in China and earlier stage markets have reached a scale that can impact overall global forecasts, with growth in China expected to slow from 30% to 24%. Despite trade considerations impacting the global economy, the macro backdrop generally remains supportive of consumer spending growth. In total, we believe the offline to online secular shifts across all markets and the higher levels of growth in earlier stage categories should continue to drive strong eCommerce growth into next year.

Financial Analysis & Outlook

Revenue:

PayPal earns revenue primarily by processing customer transactions on its Payments Platforms and from other value-added services. The revenues reported in Q2FY19 was $4.3bn, an increase of 12% compared with $3.85bn in Q2FY18.

[Source: Author]

PayPal generates revenue from two categories, transaction revenues and revenues from other value-added services.

Transaction revenue was $3.87bn, an increase of 17% compared with $3.31bn in Q2FY18. The increase was primarily due to growth in TPV, mainly from its PayPal, Braintree, and Venmo products, and in the number of payment transactions, both of which resulted primarily from an increase in its active accounts. Acquisitions completed in FY18 contributed approximately one percentage point to the growth rate of transaction revenues in Q2FY19.

Revenues from other value-added services were $427mn, a decrease of 21% compared with $539mn in Q2FY18. The decline was due primarily to lower interest and fee income earned on its consumer loans receivable driven by the sale of its U.S. consumer credit receivables portfolio.

Active Accounts:

An active account is an account registered directly with PayPal or a platform access partner that has completed a transaction on the Payments Platform, not including gateway-exclusive transactions, within the past 12 months.

PayPal ended the quarter with 286mn active accounts, an increase of 17.2% compared with 244mn accounts in Q2FY18.

Active Accounts in mln units:

[Source: Author]

PayPal in the quarter added 9mn net new active accounts, up 16.8% compared with 7.7mn accounts added in Q2FY18. Active account growth is predominantly driven by core PayPal and Venmo. We expect that the broader assimilation of a dedicated “Pay with Venmo” button on merchant websites will continue to create further monetization lift, benefiting TPV, revenue growth, and take-rate, highlighted by management’s comments that Venmo as a whole is exiting 2018 at a $200mn revenue run-rate.

Total Payment Value in USD bln:

[Source: Author]

Total Payment Volume is the value of payments, net of payment reversals, successfully completed through PayPal Payments Platform, or enabled by PayPal via a partner payment solution. It does not include gateway-exclusive transactions.

TPV grew 24% at the spot, 26% on an FX-neutral basis in Q2FY19. TPV growth was driven by Venmo, Braintree, acquisitions and person-to-person (P2P) volume. Person-to-Person payment volume, including core PayPal, Venmo and Xoom, grew to $46bn, an increase of 40% in the quarter. This represented ~27% of TPV. Venmo volume increased by 70% to ~$24bn in the quarter. The detailed breakdown of our forecast can be found in the valuation segment of this analysis.

Ownership

TOP-10 investors:

Rank

Investor Name

Latest Filing Date

% O/S

Position

Position Change

Turnover

1

The Vanguard Group, Inc.

30-06-2019

7,57%

89,11M

+1,27M

LOW

2

Fidelity Management & Research

30-06-2019

6,84%

80,50M

-1,58M

LOW

3

BlackRock Institutional Trust

30-06-2019

4,40%

51,82M

+1,78M

LOW

4

State Street Global Advisors (US)

30-06-2019

3,89%

45,81M

+0,26M

LOW

5

T. Rowe Price Associates, Inc.

30-06-2019

3,56%

41,84M

+0,00M

LOW

6

Nuveen LLC

30-06-2019

1,59%

18,69M

+1,31M

LOW

7

Capital World Investors

30-06-2019

1,44%

16,98M

+14,82M

LOW

8

Edgewood Management LLC

30-06-2019

1,43%

16,86M

+0,12M

LOW

9

JP Morgan Asset Management

30-06-2019

1,36%

15,98M

+0,30M

LOW

10

Geode Capital Management

30-06-2019

1,35%

15,90M

+0,67M

LOW

[Source: Latest SEC Filings]

PayPal institutional ownership is held at 84.40% while insider ownership was 0.10%. The high institutional ownership suggests huge confidence in quality investors.

[Source: Author]

Key developments

  • PayPal invests in MercadoLibre Equity Offerings

MercadoLibre has entered into an agreement pursuant to which PayPal has committed to make a $750 million strategic investment through the purchase of common stock. MercadoLibre, Latin America’s leading e-commerce technology company, announced that it intends to offer approximately US$1 billion of common stock.

  • PayPal Announces Planned Departure of Bill Ready

On June 20, 2019, PayPal Holdings, announced that Bill Ready will transition at the end of 2019 to pursue entrepreneurial interests outside the Company.

  • UK Competition & Markets Authority Approves PayPal’s Completes Acquisition of iZettle

PayPal Holdings announced that it welcomes the United Kingdom Competition and Markets Authority’s decision to provide final and unconditional approval of the company’s previously completed acquisition of iZettle. PayPal will now begin to integrate iZettle’s products and teams in the UK and around the globe, significantly strengthening PayPal’s in-store presence and platform.

PayPal announced the PayPal Commerce Platform, a new solution that will help its merchants drive their sales volumes in the digital commerce era. The PayPal Commerce Platform is designed to meet the specific needs of marketplaces, e-commerce platforms, and crowd funding sites by bringing together a comprehensive set of technologies, tools, services and financing solutions for businesses of all sizes. Powered by PayPal’s unique two-sided network, the PayPal Commerce Platform gives nearly any business access to a flexible, customizable suite of services that enables global growth, simplifies compliance, provides a risk protection, empowers their end-to-end payment capabilities

Valuation

Our target price of $122.00 (rounded) for PYPL is based on the average of our Public Companies and DCF analyses.

Discounted Cash Flow Analysis:

Based on our 5-year DCF analysis, we derive an approximate $120.00 (rounded) price target for PYPL. Our analysis incorporates the following assumptions: Weighted Average Cost of Capital (WACC) of ~7.6% (calculated), based upon a Beta of 1.15 (Bloomberg), a Risk-Free Rate of ~1.75% (Treasure Dep. data), a Market Risk Premium of 5.96% (Damodaran Estimate), and Terminal Growth Rate of 5.0%.

Public Companies:

Based on our EBITDA forecast and EV/EBITDA multiple for public companies, we derive an approximate $123.00 (rounded) price target for PYPL. Our analysis incorporates the following peers: Visa Inc, Mastercard Inc, Global Payments Inc, Square Inc, Total System Services Inc, Adyen Nv:

Final Valuation:

EV

Equity value

Price/share

DCF

135 371

141 287

120.3

PubComp

138 200

144 116

122.8

Financials (US$m)

2018

2019

2020

Sales

15 451

17 931

20 828

Ebitda

2 821

4 701

4 596

Net Debt

(5 916)

Peer Group Selection

2018

2019

2020

EV / EBITDA

Peer

38.5x

29.4x

23.5x

Min

34.7x

26.5x

21.1x

Max

42.4x

32.3x

25.8x

Risks

The key risks to our investment thesis on PayPal include the following:

  1. Downward pressure on take rates – PayPal’s gradual decline in take rates, which has been driven by ((i)) more large vendors capturing pricing discounts and ((ii)) competitive pressures is likely to continue.
  2. Competition – Each of PYPL’s products competes with a spectrum of payment options from the networks, through to retailers and device makers. This risk also encompasses the emergence of new competition, including payments means for large e-commerce platforms.
  3. Foreign Exchange – approximately half of PYPL’s revenues are derived from international markets.
  4. Reliance on Card Networks and Cost of Funding – PYPL relies on banks and payment processors to process its transactions, and may be subject to price increases from those providers.
  5. Consumer Credit – PYPL faces the risk that PayPal working capital account holders will default on their payment obligation, making the receivables uncollectible and creating the risk of potential charge-offs.
  6. Regulation – New regulations, or changes to existing regulations, may impact how PYPL operates and / or its profitability.
  7. Economic Conditions – Adverse economic conditions may impact the consumers or financial institutions that PYPL does business with, which could negatively impact its financial results.
  8. Political Uncertainty – Regime change or changes to government policy may have implications for regional stability, trade, or economic conditions, and could negatively affect PYPL’s results.
  9. Renewal of Large Clients – PayPal derives a significant amount of revenues and operating income from a single client.

If any of these risk factors have a greater downside impact than we anticipate, the share price will likely have difficulty attaining our target price. However, should they be less than anticipated, the stock could trade above our target price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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