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Proprietary Data Insights Financial Pros’ Top Payment Processing Stock Searches in the Last Month
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The #1 Value Trap Stock Fooling Investors
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Digital payments are projected to reach over $3 trillion this year. Analysts expect this to grow by 10.73% annually over the next four years. So why is PayPal’s (PYPL) stock down more than 80% from its highs in 2021? One word – competition. Companies like Stripe have stunted PayPal’s growth. While revenues continue to grow, PayPal’s total customers have started to drop. Yet, financial pros searched this stock 3x more than its closest competitor, Visa (V). Given the company’s bleak earnings report, we weren’t sure why. As we dug deeper, we realized PayPal may be setting a value trap for the unsuspecting investor. PayPal’s Business In 2015, PayPal spun off from eBay into its own publicly traded company. Today, this digital and mobile payments behemoth operates across more than 200 markets and over 400 million active accounts. PayPal’s edge lies in its comprehensive suite of payment solutions, from Venmo for social spending to Xoom for international transfers 90% of PayPal’s revenues come from payment processing, while value-added services makes up the other 10%. The chart below illustrates PayPal’s current challenges:
The number of active accounts dropped year over year even as the total number of transactions and its value rose. Given the +10% annual growth rate for the industry, these figures bring into question PayPal’s long-term strategy. Financials
Source: Stock Analysis Along with PayPal’s shrinking customer base, the company has also seen its profitability slide. Gross margins are down 5% from two years ago, while free cash flow is down over 10% from where it was in 2018 and 2020. Still, PayPal generates nearly $5 billion in cash from operations and roughly $4.00 per share in free cash flow. Valuation
Source: Seeking Alpha Compared to its peers, PayPal is cheap. It trades at just 12.9x operating cash flow and 16.1x forward earnings while Visa (V) is at 27.4x and 28.2x respectively, while MasterCard (MA) is even higher. Only Stoneco (STNE) trades at a lower price-to-cash ratio, likely to account for the risk associated with it being a Brazilian payment processing company. Growth
Source: Seeking Alpha At first glance, PayPal’s revenue growth seems solid. It delivered better 5-year average growth than Visa. Even it’s YoY EPS growth looks amazing. But again, when you dig into the details, those numbers are being propped up by higher spending from a dwindling customer base. Profitability
Source: Seeking Alpha The other confounding factor is PayPal’s profitability. On paper, it looks great. Sure, it’s not as wonderful as its peers, but it’s got a net income margin at 14.3% and a free-cash-flow margin of 18.4%. This is precisely why we believe this company is a value trap.
Our Opinion 2/10 At some point PayPal’s customer base should stabalize and even grow. However, we believe that may be years down the road. In the meantime, management will spend money to try and revitalize the company. While this may look like a value, if you strip out transaction volume and price increases, PayPal isn’t worth its valuation. We could see 50% more downside for the company in the near future and wouldn’t touch it with a 10-foot pole. |
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