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Proprietary Data Insights Financial Pros’ Top Payment Processor Stock Searches in the Last Month
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Why Financial Pros Keep Holding PayPal |
Not every recommendation we make works immediately. We upgraded PayPal (PYPL) to a 9/10 back in early May. Since then, the stock has fallen roughly 8%, though it was down more a few weeks ago. Yet, the company’s latest earnings release reaffirmed our belief that PayPal is undervalued. But the real question is whether it’s become a value trap. PayPal’s Business Once part of eBay, PayPal has become a full-blown payment services company in its own right. Faced with increasing competition from upstarts like Stripe, PayPal struggled to hold onto customers. It’s seen the number of active accounts stall in the last few years even as total transactions increased.
Source: PayPal Q3 2023 Investor Relations Revenues are reported as either transaction volume (90% of total sales) or other value-added services (rental fees, partnerships, and other services provided to merchants). The U.S. makes up 57% of total revenues, while other markets account for 43%. PayPal’s latest earnings report showcased robust growth with a 15% surge in Total Payment Volume, hitting $387.7 billion, and an 11% jump in payment transactions. However, a slight dip in active accounts, down to 428 million, hints at possible market challenges. The moderate revenue uptick and static operating margins also raise flags about PayPal’s growth pace and profit scalability. The good news is the new CEO and CFO should deliver a new strategy in the coming months. Financials
Source: Stock Analysis PayPal’s double-digit revenue growth slowed to sub-10% in the past year as volume increased, but total active accounts remained flat. Interestingly, gross margins fell, which isn’t something you’d expect with scale. While the company managed to keep operating and profit margins elevated, free cash flow took a dramatic turn for the worse. This tells us a chunk of the earnings came from paper gains on their holdings such as cryptocurrencies. Valuation
Source: Seeking Alpha As mentioned, PayPal looks cheap on P/E, price-to-cash flow metrics, and even price-to-sales metrics compared to key competitors like Visa (V) or Mastercard (MA). But as the price-to-earnings growth (PEG) ratio shows, it’s not improving profitability at the same rate. Hopefully, new management will help with that. Growth
Source: Seeking Alpha PayPal expects revenue growth next year to slow to 8.3% as crypto markets stall and consumer spending gets cut by higher interest rates. Yet, somehow, Visa forecasted 10.7%, Mastercard 14.2%, and Block (SQ) 11.5%. In fact, it’s only forecasting higher growth than Capital One Financial (COF), whose shares have flatlined since mid-2022. So, maybe the issues are PayPal-specific. Profitability
Source: Seeking Alpha PayPal does deliver a decent net income margin, something Block doesn’t have. And its free cash flow margin is higher than Block’s as well. But it’s far below Visa’s or Mastercard’s. And compared to those two companies, PayPal’s return on equity, assets, and total capital are minuscule. Our Opinion 9/10 We’re sticking with our rating. Despite the uncertain future, PayPal generates too much cash to ignore. It could be a value trap. But at worst, it’s probably dead money. Given the upside potential, we believe it’s worth the risk. |
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