PayPal Stock (NASDAQ:PYPL) is one of the best stocks to buy for the long term. Even though the macro environment isn’t good, the company is growing steadily and doing well financially. Strategic projects should help keep a business’s growth rate steady and make a big difference in its margin.
The Updated Strategy Is Already Paying Off
PayPal’s business has always been based on products that come and go, and it used to depend a lot on eBay (NASDAQ:EBAY). A few years ago, PayPal’s management started a set of changes that have made the company very different.
Today PayPal has a lot of different products that are all meant to keep users interested. It lets you do almost anything, from sending money and paying with a digital wallet to BNPL lending, buying cryptocurrency, and getting a debit card through a Mastercard (NYSE:MA) partnership.
The company can grow quickly in the digital payments market because it has added many new services. Total Payment Volume grew by an average of 28.11% per year from 2015 to 2021.
The company’s high business growth rates will continue in the future because the management’s development strategy is working well. This is true even though the macroeconomy is uncertain.
First, PayPal has stopped trying to take over and keep users and is now focusing on customers with middle- and high incomes. This is good because the company’s target market (a large part of its TPV comes from e-commerce and cyclical goods) is less affected by real income drops and slowdowns. So, we don’t think the recession will cause a big drop in the average ticket or number of transactions. Second, the market for digital payments keeps growing and taking the place of cash. BusinessOfApp says that by the end of 2021, there would be 2.1 billion users of mobile transaction systems (mostly in China).
Both developing and developed countries still have a lot to gain from using electronic transaction services. Even in Spain and the UK, the rate at which similar systems are used does not go above 30%.
Last but not least, strategic partnerships are still a big part of PayPal’s organic growth. Now, the company focuses on payment systems that don’t need to be touched. In the US, users will be able to add Venmo and PayPal credit cards to their Apple Pay system in 2023. Apple Pay is the most popular way to pay for things without touching them.
According to our calculations, PayPal’s TPV will grow at an average rate of 11.17 percent. This will be driven by steady growth in Active Customer Accounts (we expect the number of users to reach 495 million by the end of 2025) and more significant growth in transactions per account. This is because PayPal’s ecosystem is changing, the service is becoming easier to use every day, and more people are switching to digital payment methods.
Significant Margin Expansion
PayPal has great chances of increasing its profit margin and growing its revenue on its own.
After the Q3 report, the management said they wanted to increase the organic margin by about 100 basis points in 2023 by cutting transaction costs.
But PayPal must have a policy of moving its credit relationships outside of the company. In other words, it reduces the risk of bad debt building up in the company’s assets and partially removes interest-rate risks, which are especially important when interest rates are rising. We don’t think that PayPal will stop lending to consumers because of how popular the BNPL system is, but bringing in third-party partners will help reduce loan loss provisions to 4.93 percent of revenue by 2025.
Also, shifting the company’s focus to a specific market price segment will make it easier for marketing to talk to customers. This will help slow the rate of increase in advertising costs and be good for the business margin.
Due to the big strategic moves, we think that PayPal’s operating margin will rise to 19.2% by 2025, the same as an EBITDA margin of 23.2%.
After Q3 earnings, we lowered our EBITDA forecast from $97.6 billion (+7% y/y) to $91.4 billion (+0.2% y/y) for 2022 and from $99.1 billion (+2% y/y) to $97.0 billion (+6.2% y/y) for 2023, due to:
- The long-term effects of the high value of the dollar compared to other currencies;
- A lower profit forecast because of a change in the mix of products and the fall of the cost-per-click metric;
- A change in the plan for the advertising market to improve.
The updated estimates show that the effects of the decline and recovery will be more gradual.
We are figuring out PayPal’s fair value price by using 2025 EV/EBITDA multiples and FCF Yield. The stock is worth $148 based on these methods. We’re figuring out how much PayPal stock is worth by taking 13% off the prices we think they’ll be in 2025. The rating we have for the shares is still “Buy.” The upside potential is 88%.
We’re keeping the shares’ Buy rating based on the new assumptions. The profit is 70%.
Over the next few years, PayPal will do much better than the index. A new management strategy, targeting an audience with a high LTV, and doing work on the side are all big factors in how well a business will do in the future. PayPal has done a good job of being both a value company and a growth company. Even though the economy slowed down in 2022, PayPal has shown that it can run efficiently and make good money.
We recommend buying PayPal stock at its current price, but you should be prepared for it to go up and down because the major indexes are expected to fall further, and the market is now very wary of growth technology companies.
Keep an eye on PayPal’s financial statements, reports on the industry, and reports on its competitors to manage the position (Square, Affirm, Visa, MasterCard).
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