Investment Thesis
The digital payments solutions firm PayPal Holdings, Inc. (NASDAQ:PYPL), which was a hot favorite among investors as the fintech sector grew during COVID as a result of record-low borrowing costs and higher consumer spending. The stock has been heavily criticized since it peaked at $308.5 in July 2021 and is presently trading at $88, down 54.6% year to date and around 72% below its high.
The tech sector’s multiples contraction, unfavorable investor sentiment due to rumors of unrelated investments (intentions to buy Pinterest), disappointing Q3 and Q4 2021 results followed by a reevaluation of the outlook and changes in strategy, among other factors, all contributed to this downward trend. However, there will be a reduction in volatility brought on by unfavorable shocks now that the management has lowered its guidance to more attainable aims.
On the one hand, I believe the company will continue to experience challenges shortly as the e-commerce sector struggles to owe to supply chain disruptions, record inflation rates, and an increase in in-store purchasing. In addition, revenue has been lost due to eBay leaving the PayPal platform. However, the market appears to have sufficiently outperformed the dominant player in the payments industry. PayPal’s business and growth initiatives make it a very appealing long-term investment, confirming my buy recommendation.
How to Become a Payments Giant
To establish itself as the industry leader in the digital payments ecosystem that links consumers and businesses, PayPal has been consistently investing in its expansion. Its platform processes over a trillion payments yearly and has 429 million active accounts, including 35 million active merchant accounts.
It has increased the range of products and services it offers consumers and businesses through smart acquisitions. These services include remittances, P2P, payment processing, gateways, and associated ones like POS, lines of credit, invoicing software, etc. Additionally, the recent decision to prioritize client interaction above establishing new accounts is a positive step. To maintain payments flowing inside its ecosystem and boost revenue through greater user engagement, PayPal now has a robust infrastructure in place.
The All-in-One Digital Wallet
PayPal’s SuperApp might give the corporation a significant competitive advantage over rivals. When the all-in-one app was introduced in 2021, the market was critical of it. Super apps, which are very well-known in China and other Asian markets, were allegedly unnecessary for the US market.
However, the corporation now needs an all-in-one app to increase user engagement and keep payments on its platform to boost profitability. Some new app features are already available, including bill payments, coupons and offers, high-yield savings accounts, crypto buying and selling, and QR codes. Subject to regulatory permissions, other capabilities that were initially anticipated would take some time, such as stock offerings and other crypto-related functions.
The user may practically carry out all types of financial transactions with PayPal’s digital wallet, thanks to so numerous functionalities of one app. Additionally, the Buy Now Pay Later (BNPL) market is still relatively young. It is anticipated to expand over the next few years, and selecting BNPL will boost consumer spending through PayPal. This will boost interaction and persuade customers to keep their money in PayPal’s digital wallet instead of utilizing it only for purchases.
The Unbranded Processing Industry is Expanding
The PayPal Holdings-owned unbranded payment gateway and processor, Braintree, has recently experienced rapid growth. Although the business is private about its actual volume, the management asserts that it increased by 79 percent in the previous year and continued to do so in the first quarter.
Famous merchants using the Braintree platform include Yelp, Airbnb, Dropbox, Eventbrite, and more. The management anticipates adding a few more high-profile individuals in the upcoming quarters. Braintree is a very dependable payment processor due to its integration with PayPal’s modern tech stack and its ability to accept payments via Venmo and PayPal. As a result, this company has excellent growth possibilities.
The Monetization Plan for Venmo Is on Track
Another strategic investment made by PayPal that has been successful is Venmo, and the app is predicted to experience remarkable growth. Venmo started by enabling peer-to-peer payments and is constantly updating its app.
Users can now create business profiles to accept payments or make purchases at more than 2 million PayPal retailers nationwide. Venmo’s TPV increased by 12% YoY in Q1 2022 to $57.8 billion. Four cryptocurrencies are among the ones that Venmo users can purchase and sell, so there is room to raise Venmo’s fees to keep up with market rates.
Venmo’s agreement with Amazon, which will enable Venmo payments on its platform, is another significant milestone for the company’s development. Another item to remember is how aggressively the corporation has repurchased shares in recent quarters. Specifically, the CFO stated the following during the Q1 buyside call:
“You’ve seen us be more aggressive on buybacks the past few quarters; I’d expect that we would be buyers at this price. We think the intrinsic value of our business is far more than where we trade today.”
What Investors Today Should Anticipate
Jika.io claims a relatively strong association between the traffic to PayPal.com and business activity. For instance, the income has shown a constant or moderate traffic volume growth throughout the previous four quarters.
Accordingly, the data on traffic point to a slow rise and an essentially constant line for the upcoming quarter. However, PYPL’s revenue experienced 24 downward adjustments, demonstrating the market’s persistent pessimism and creating the opportunity for a mildly positive surprise.
Final Thoughts
The stock has a higher value than it is now trading, and I tend to concur. However, I do not anticipate any meaningful tailwinds shortly because of the recessionary economy and PayPal’s reliance on discretionary purchasing.
Speculating on traffic statistics and financial outcomes is undoubtedly not the ideal course of action for long-term investors. Still, any unfavorable surprise could provide a better entry point. Nevertheless, at the current share price levels, PYPL has the buy recommendation with a medium investment horizon.
Featured Image: Megapixl © Michaelvi
