PYPL – The House That Elon Built

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It’s safe to say Elon Musk is the most famous CEO on the planet. 

His work with Tesla, SpaceX, and the Boring Company is legendary. However, before Elon decided to save the planet, his big breakthrough came in the digital payments space.

But many folks forget he co-founded PayPal (PYPL) with another legendary investor, Peter Thiel. 

In addition, several former PayPal employees have formed some of the best companies in the world, including YouTube, Yelp, Affirm, LinkedIn, and Palantir Technologies. 

And while Elon has moved on to other things, PayPal is still here and bigger than ever. Shares have gotten rocked in 2022. But does that make it a buy?

The biggest knock against the company was the ever increasing competition from Stripe, Block (SQ), Visa (V), and others.

Plus, it lost one of its biggest customers, eBay (EBAY).

That’s what made the most recent quarter so interesting.

After the report, search volume for the company skyrocketed amongst financial pros and retail investors, vaulting it from #3 to #2.

So, what exactly did they say?

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PayPal’s Business

PayPal Holdings, Inc. (PYPL) runs a digital payments platform that connects merchants and consumers across the globe. The company offers payment solutions under the names of PayPal, PayPal Credit, Braintree, Venmo, Xoom, Zettle, Hyperwallet, Honey, and Paidy. 

Its payment platform allows individuals to send and receive payments in 200 markets and over 100 currencies, withdraw money to their bank accounts in 56 currencies, and hold balances in their PayPal accounts in 25 currencies. 

Additionally, customers can buy Bitcoin, Ethereum, Litecoin, and Bitcoin Cash through its platform.  PYPL has 429 million active accounts on its platform, more than double what it had in 2015, with 181 million active accounts.  

In the most recent quarter, the company posted revenue growth of 9% with operating cash flow of $1.5 billion and free cash flow of $1.2 billion, up 12% and 22% respectively from the prior year.

A recent stake of $2 billion by Elliot Investment Management was seen as a positive sign in which the investors expect the firm to help PayPal unlock more shareholder value.

One of the key growth drivers for the company has been Venmo, a simple social payments app that allows users to send and receive money for free the majority of the time.

Investors had been worried about the company’s growth prospects in light of the increased competition and loss of eBay as a customer. Yet, it appears PayPal is coming out on the other side of that now.

Financials

Despite the weakness in its share price, PYPL continues to grow at a phenomenal rate. The firm has nearly doubled its revenues in four years. 

The company reported net revenues of $6.8 billion in Q2 2022. Excluding eBay, revenues grew 14% on a spot basis. Furthermore, the firm appointed a new CFO, Blake Jorgensen, and announced an initiative that it believes will achieve $900 million of cost savings in the fiscal year 2022.

One concern investors might have—the firm had a net income loss in Q2. And its operating margin fell from 18.1% in Q2 2021 to 11.2% in Q2 2022. However, it’s not all bad news. PYPL has improved its free cash flow, reaching $1.3 billion in Q2 and growing 22%. The company has a current ratio of 1.23x, which means it has enough assets to cover its short-term liabilities. 

The capital structure for PYPL is as follows: total debt of $11.3 billion, cash of upwards of $9.3 billion, and a market cap of $111 billion. 

Valuation

Although PYPL is a profitable company, one could still argue its shares are richly priced. The firm has a P/E GAAP (ttm) of 54.45x. However, that is still better than some of its competitors, Block (SQ), Sofi (SOFI), and Affirm (AFRM).

Moreover, ratios like price-to-sales are improving. Its price-to-sales ratio of 4.22x is significantly better than the company’s 5-year average of 8.7x. And its price-to-cash flow is also showing signs of improvement. It sits at 18.42x, while its 5-year average has been 42.3x.

Growth

PYPL is still experiencing growth, although it is slowing down, due to the weakness in the economy.

Its EBITDA growth (YoY) is negative at -9.38%. However, its forward EBITDA growth is 8.48%. And while its EPS growth diluted (YoY) is -57.29%. That too is expected to improve, as its forward EPS growth diluted is 7.49%

Profitability

PYPL has a higher gross profit margin than Block (SQ), 43.47% vs. 31.33%. And its EBITDA margin of 17.58% is significantly better than Block’s -0.98%. Furthermore, its return on equity of 10.11% is far superior to SQ, SOFI, and AFRM.

Our Opinion 7/10

There are several companies in the digital payments business. However, PYPL is among the best. And while it does trade at a high P/E ratio. We believe the company’s management is strong, and with the business lapping its loss of eBay.

This makes the stock a good snag on a decent pullback.