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Proprietary Data Insights Financial Pros’ Top Payment Processing Stock Searches in the Last Month
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Is PayPal (PYPL) More Than a Value Trap? |
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PayPal (PYPL) revolutionized online payments when it launched in 1998, becoming a household name in digital transactions. The company’s platform enabled secure and convenient money transfers, purchases, and merchant services for millions of users worldwide. Yet, a lack of strategic direction allowed the company to become complacent, failing to retain its customers as competitors emerged. So, it was noticeable when things finally started to turn around for the company. Financial pros started looking at this stock more than all other payment processors combined, according to our TrackStar data. Active accounts dropped 1.4% in Q2 YoY. But they were up QoQ for the third quarter in a row. By most valuation measures, the company is extremely cheap. But is it more than just a value trap? PayPal’s Business From eBay purchases to splitting dinner tabs, PayPal’s tentacles reach into 200 markets globally. Its arsenal includes peer-to-peer payments, merchant tools, and even buy-now-pay-later options. The company’s 429 million active accounts speak to its widespread adoption, which has given it 40.5% of the total payment services market, including Venmo, which they’ve owned since 2013. PayPal segments its business into the following areas:
In its latest quarter, PayPal reported an 8% increase in revenue to $7.9 billion, driven by growth in total payment volume and transaction revenues. The company is actively expanding its offerings, recently announcing the general availability of its Fastlane checkout solution in the U.S. and deepening partnerships with major platforms like Meta and DoorDash. Management hopes innovations in areas such as cryptocurrency integration, buy-now-pay-later services, and in-store payment options will help the company regain its competitive edge. Financials
Source: Stock Analysis At first glance, things don’t look so bad for PayPal. Revenues appear to be consistently growing while margins, although down in some areas, are still pretty solid. However, much of the revenue growth has come from higher volumes per transaction, not necessarily more customers. If anything, it’s a sign of inflation, not necessarily more spending. Yet, there’s no denying the company is attractive, generating $7.3 billion in cash from operations in the trailing 12-month period with very little CAPEX and total debt of $13 billion. Unsurprisingly, management has spent $5.3 billion on share buybacks in the past year, a healthy 7.2% yield. Valuation
Source: Seeking Alpha Because of its exceptional cash generation and profitability, PayPal trades at just 10x operational cash flow. While that’s not as cheap as Capital One Financial (COF) or Discover Financial Services (DFS), PayPal isn’t burdened with holding customer loan balances like they are. Compared to pure payment processors like Visa (V) and Mastercard (MA), PayPal looks like a steal. Growth
Source: Seeking Alpha On the surface, PayPal’s growth metrics look great. However, when you look at the EPS and net income growth over the last few years, you find a wide gap between them and other payment processors. That’s where you start to see the divergence. Profitability
Source: Seeking Alpha Those divergences get even wider when you look at PayPal’s profitability. To be fair, it doesn’t operate in the same way as Mastercard or Visa. But if it’s unable to achieve better overall profits, why bother? Our Opinion 6/10 This is a tough one for us. We don’t see any real growth catalysts for the stock. However, management has committed to essentially shoveling cash generated into share buybacks. That would be done in less than a decade at the current share price. And there’s nothing materially wrong with their business. So, in a first for us, we’d call this a toss-up. |
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