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Paypal (PYPL) Investment Write Up

Paypal (PYPL) Investment Write Up

PYPL is a leading payments company, operating a two-sided network with 377 million accounts, comprised of 348 million consumer accounts and 29 million merchant accounts. As of April 27th, PYPL has a market cap of $316bn, and in 2020 generated $21.5bn of revenue and $5bn of FCF. PYPL’s network is massive, with 15.4 billion payment transactions taking place in 2020, totaling $936bn of TPV (total payment volume).

The company benefits from numerous competitive advantages including network effects, a trusted brand, and economies of scale/significant operating leverage. PYPL has experienced massive growth since IPO’ing in 2015, with 18% annualized revenue growth and 23% annualized FCF growth from 2015-2020. Additionally, PYPL’s non-transaction expense as a percent of revenue declined from 38% in 2015 to 30% in 2020, and I expect margin expansion to continue given PYPL’s high incremental operating margins of 34% in 2020. PYPL has substantial growth opportunities ahead driven by the continued growth of e-commerce which is growing ~15%/yr., in addition to the company’s expansion into offline payments, integrating shopping and rewards into its platform, and expansion into financial services (direct deposit, checking, debit/credit cards, remittances, gig worker payouts, crypto, etc.). Given how large these markets are (offline payments, financial services), even small market share gains, can lead to significant earnings growth for PYPL. The biggest risk facing PYPL is the substantial competition the company faces across e-commerce and offline payments. From a valuation perspective PYPL trades at 53x 2021 FCF and 42x 2022 FCF, although I expect PYPL to grow FCF/share at more than 20%/yr. over the next 5 years. My base case is a 9% IRR over the next 5 years however I see substantial upside optionality driven by partnerships with financial services companies, and marketplaces, and PYPL's expansion into offline payments and financial services.


PYPL was founded in 1998, was acquired by EBAY in 2002, and served as EBAY’s exclusive payment processor prior to being spun out as an independent company in 2015. Transaction related revenue accounts for 93% of PYPL’s revenue and is comprised of fees charged to merchants for accepting PYPL, foreign currency conversions for money transfers, cross-border transactions, and to facilitate the instant transfer funds to debit cards or bank accounts. Non-transaction related revenue accounts for 7% of PYPL’s revenue and includes other value-added services earned through partnerships, referral fees, subscription fees, and fees earned on loans, and interest earned on customer balances.

From a geographic standpoint, 50% of revenue is generated in the U.S., 10% in the UK and the other 40% in other markets across EMEA, Asia, and Latin America. EBAY made up 6% of TPV in 4Q20 compared to 19% in 4Q15 and will continue to decline as non-EBAY merchant volumes grow at a much faster rate. Additionally, Adyen will become EBAY’s primary payments processing partner in 2021, although users will still be able to pay with PayPal.

Key products and services

PYPL products and services

Benefits for consumers

PYPL offers a variety of services to consumers across payments, financial services, and shopping tools. Payments are at PYPL’s core, enabling consumers to transfer money, withdraw funds, and make purchases using a variety of funding sources in easy, fast, and secure transactions. PayPal has recently introduced a variety of financial services including debt and credit cards, crypto, direct deposit, Buy Now Pay Later (BNPL), and remittance payments, many of which compete directly with traditional banking services. Finally, PYPL has introduced tools to help users get rewards and benefits for shopping such as deals and offers, price tracking, and drop lists.

Benefits for merchants

For merchants, PYPL offers products and services across payment processing, merchant services, and marketing tools. PYPL powers all aspects of digital checkout online, on mobile, and in store, offer access to credit, help identify fraud and risk management, offer tools and insights to attract new customers and increase sales. PYPL’s payments platform enables merchants to accept all types of online and offline payments. PYPL’s wide variety of payment options enables merchants to drive increased conversion through higher engagement. PYPL also offers credit products to merchants for working capital loans and business loans, as well as other services such as vendor/gig worker payout, fraud and risk management, marketing and analytics, reward solutions, shipping solutions and business debit cards.

Exceptionally high historic growth rates

PYPL has experienced significant revenue and earnings growth since becoming a public company in 2015. During that time, TPV increased from $288bn to $936bn, revenue increased from $9.2bn to $21.5bn, FCF increased from $1.8bn to $5bn and operating margins improved 400bps from 21.1% to 25.1%. The key drivers were a 16% annual increase in active accounts, and an 8% annual increase in transactions per account, which drove the 27% annual TPV growth. Revenue growth at 18%/yr. was weaker than TPV growth as PYPL’s take rate declined from 2.85% to 2.13%, driven by the reduced reliance on EBAY which has take rates of 4% compared to 2.9% for the typical merchant. EBAY’s contribution to TPV has declined from 19% to 6% over that time frame. However, operating margins improved leading to a 23% annual increase in operating income and FCF during that time frame.

PYPL Key Metrics

Competitive Advantages

PYPL benefits from numerous durable competitive advantages including network effects, economies of scale, and a trusted brand.

Network effects

PYPL’s substantial network effects are driven by the company’s two-sided network connecting 29mn merchants and 348mn consumers. PYPL is a textbook example of a network effect, as the more consumer accounts PayPal adds the more merchants are incentivized to accept PayPal as a checkout option. Likewise, as more merchants offer PayPal at checkout, the more convenient it is for consumers to use PayPal for payments. Unlike many other payments companies, PYPL has added numerous products and services for both merchants and consumers, to incentivize both groups to join the network.

PYPL Network Effect
PYPL has a 70% appearance rate on e-commerce in the U.S. driven by its broad adoption, 4-5x the appearance rate of Amazon Pay. Additionally, PayPal checkout converts at 89%, compared to 49% for the payments industry. As PYPL adds more products and services (discussed further below) to increase their value proposition for merchants and consumers that will further perpetuate the network effect.

PYPL adoption rate
Trusted Brand

PYPL also maintains one of the most trusted brands in payments and financial services.

PYPL trusted brand

Specifically, users are 54% more willing to buy when a business accepts PYPL, and 59% of PYPL users have abandoned a transaction because PayPal wasn’t an option at checkout. Furthermore, PYPL has a NPS score of 67, ranking as one of the top brands as shown below. Additionally, PYPL was ranked the 4th most trusted brand of roughly 2,000 brands in this survey.  PYPL has successfully leveraged its brand through a variety of partnerships with Facebook, MercadoLibre, Uber, and GoPay.

Significant scale driving operating margin improvements

Finally, PYPL benefits from substantial scale and operating leverage as roughly 75% of PYPL’s non-transaction expenses are fixed. PYPL’s non-transaction expense as a percentage of revenue has declined from 38% in 2015 to 30% in 2020, and I expect will continue to decline to 23% in 2025. Importantly PYPL’s incremental margin has increased from 25% in 2018 to 34% in 2019 and 2020, and as a result I expect continued operating margin expansion despite lower take rates, as operating expenses grow at a much lower rate than revenue going forward. Specifically, I expect PYPL’s take rate to decline from 2.13% in 2020 to 1.85% in 2025, while operating margins improve from 15% in 2020 to 21% in 2025.
PYPL Operating Leverage

Strong ROIC’s

Driven by its numerous competitive advantages, PYPL generated a 17% ROIC from 2015-2020 with an upward trend during that time frame. This has largely been driven by improved margins due to the company’s scale as mentioned above. PYPL’s improved ROIC is even more impressive when considering the substantial number of acquisitions PYPL has made (detailed below), with most of these acquisitions yet to contribute materially to revenue and earnings. The decline in PYPL’s ROIC in 2020 is driven by the $4bn acquisition of Honey, with minimal earnings contribution to date.


Historic Capital Allocation

Dan Schulman has held the CEO reigns, since PYPL IPO’d in 2015. During that time, PYPL generated $24bn of CFO and issued $7.8bn of debt to fund $4.5bn on capex, $9.5bn on share repurchases, and $9.7bn on acquisitions and strategic investments.

PYPL Capital AllocationFrom 2015 to 2020 PYPL completed numerous acquisitions and strategic investments to expand its product suite and geographic footprint. While PYPL’s acquisitions have been bolt-on in nature, I believe in aggregate they have set up the company extremely well to compete across e-commerce, in person payments, and financial services. Here’s a quick overview of PYPL’s acquisitions, with more detail below on how these acquisitions will drive revenue growth going forward.

Honey: acquired for $3.6bn in cash and $400mn in RSU’s allowing PYPL to personalize shopping experiences for consumers while driving conversion and increasing consumer engagement and sales for merchants. Honey had 17 million users, and commerce tools including: a web and mobile tool that allows you to find and apply savings across 30,000 merchants, price tracking and alerts, and a loyalty rewards program. This acquisition allows PYPL to become involved with consumers at the beginning of the shopping experience, moving the company to the top of the payments funnel.

GoPay: acquired 70% interest in GoPay in 2019, and the remaining 30% in 2021. GoPay is an online and mobile payments provider in China, making PYPL the first foreign platform to process transactions in the country. PYPL has an estimated 1% digital penetration in China, and GoPay represents a massive opportunity for PYPL.

Hyperwallet: acquired in 2018 for $400mn to improve merchant payouts especially for gig economy workers. Additionally, the acquisition improves PYPL’s ability to provide an integrated suite of payment solutions to e-commerce platforms and global marketplaces.

iZettle: acquired in 2018 for $2.2bn to expand PYPL’s in-store presence and strengthen its Payments Platform to help small businesses globally.

Xoom: acquired in 2015 for $890mn to address enable global remittance payments.

MercadoLibre: PYPL made a $750mn strategic investment in MercadoLibre in 2019 (discussed in more detail below).

Uber: PYPL made a $500mn strategic investment in Uber in 2019.

Future capital allocation & potential acquisition targets

At its recent Investor Day Presentation, PYPL guided to $40bn of FCF through 2025, with 30-40% used for share repurchases, implying $12-16bn of share repurchases. Additionally, I expect PYPL to spend $5bn on capex over the next five years, leaving ~$20bn available for acquisitions, or additional share repurchases. Additionally, PYPL has $7bn of cash as of YE20 providing additional dry powder for acquisitions. Given PYPL’s strong growth prospects I do not expect a dividend to be implemented in the next 5 years.

In terms of potential acquisitions, PYPL has plenty of opportunities to expand the range of products and services offered to small and medium size enterprises driven by the acceleration of e-commerce and digital payments. Merchants face higher decline and fraud rates on digital transactions. As shown below key value-added services for merchants include financing, marketing support, software, cloud and design, loyalty and gift, and payroll/employee management. Some of the potential merchant acquiring and service providers are shown below.

PYPL SMB opportunities
Outside of merchant services, there are many potential targets across financial services ranging from neo/challenger banks, digital lending, remittances, cryptocurrency, and personal finances.

PYPL Fintech Opportunities

Additionally, PYPL may make strategic investments in other marketplaces that don’t currently accept PYPL such as (estimated 2021 GMV): Flipkart ($16.4bn), Houzz ($13.7bn), Coupang ($9.5bn), Allegro ($8.6bn), Kickstarter ($5.3bn), etc. PYPL was previously prohibited from working with large marketplaces per its EBAY operating agreement but is now free to do so as its EBAY agreement expired in July 2020. Potentially, PYPL could acquire a marketplace, especially one with strong growth outside the U.S.

Massive Growth Opportunities

I expect PYPL to generate substantial FCF growth ahead driven by a number of secular trends: continued growth of e-commerce including the rise of marketplaces, the shift toward electronic and mobile payments from cash and check, electronic international remittances, as well as benefiting from general economic growth. Additionally, PYPL is focused on a number of other trends such as BNPL, Crypto, and offering additional financial services to consumers (loans, checking/savings accounts, equity trading) and to merchants (lending, worker payouts).

Driven by these numerous secular growth avenues, PYPL unveiled aggressive guidance at its recent 2021 Investor Day. PYPL expects to double its active accounts to 750M by 2025 and triple its TPV to $2.8TN. This will drive more than $50bn of revenue in 2025, representing 20% annual organic revenue growth. 

PYPL users comparison

Additionally, adjusted operating margins (inclusive of stock-based comp) are expected to increase to ~30% from 25% today, leading to 22% annual EPS growth through 2025. PYPL expects to generate more than $40bn of FCF during this time frame, guiding to $6bn of FCF in 2021, and increasing to $10bn in 2025.However, I believe PYPL’s guidance is likely conservative given the substantial amount of optionality the company has across in person payments and financial services. Furthermore, PYPL’s substantial FCF generation over the next 5 years and $7bn of cash on the balance sheet will enable PYPL to make strategic acquisitions to drive additional growth.

At a high level, key drivers for PYPL’s growth will be the rollout of additional products and services to drive new user growth and increased penetration among existing users. Specifically, PYPL has detailed its aspirations to become a super app for consumers, focused on payments, shopping and financial services including high-yield savings vehicles, check cashing, direct deposit, subscription management, among other services; and shopping, where PYPL plans to integrate features such as Honey’s personalized coupon engine and reward programs. Additionally, PYPL is focused on expanding its products and services aimed at offline retail which expands PYPL’s TAM from $2tn to $10tn. PYPL plans on rolling out numerous products and services on its app in 2021 and 2022 to fully integrate payments, shopping, and financial services.

Let’s look at the key growth drivers in each area: E-Commerce, Offline/Shopping, and Financial Services.


Globally e-commerce revenue is $4.3tn and expected to grow at 11%/yr. through 2024 as e-commerce continues to take market share from in-person retail.

Global ecommerce revenue

Credit Suisse estimated PYPL’s online TAM at $4tn growing to $8tn in 2023, which includes e-commerce (ex-Amazon, BABA & JD), and other categories such as online travel, ride-sharing, video games, food delivery, online charitable donations, and online event ticketing.


Within the U.S., e-commerce revenue is expected to more than double by 2030 driven by increased penetration. As mentioned above, PYPL is the dominant checkout option for e-commerce, available at 70% of online merchants in the U.S., and PYPL will benefit meaningfully from continued e-commerce penetration and growth.

US ecommerce market share
COVID-19 has accelerated digital market penetration, and in the U.S. increased from 12% to 17% in 2020 and is expected to increase to 24% by 2025.

us digital market penetrationIn terms of international expansion, PYPL is focused on increasing its penetration in key markets across Europe (UK, Germany, Switzerland, France, Italy & Spain), Latin America (Brazil and Mexico), Japan, China, and Southeast Asia. In many of these markets, PYPL’s market share is as low as 1-5% which provides substantial opportunity to grow revenue. However, many markets also have local champions, such as in China, where roughly 70% of payment volumes are un-addressable due to incumbents (Alibaba, Tencent, JD.com).

Partnerships have helped PYPL expand internationally:

MercadoLibre. In early 2019 PYPL invested $750mn in MercadoLibre and later signed a commercial agreement which lets MELI customers in Brazil and Mexico pay with PayPal on the marketplace and on Pago checkout pages. In addition, it opens acceptance for Pago in PYPL’s global merchant footprint and allows for remittances through Xoom to be delivered to Pago wallets. The agreement includes hundreds of thousands of MELI merchants and over 48mn Mercado Pago users. Across its entire platform of 18 countries, MELI had $21bn of Gross Merchandise Value (GMV) and $50bn of Total Payment Volume (TPV) in 2020. Brazil and Mexico accounted for ~70% of MELI’s revenue in 2020 and are growing at very high rates (Brazil revenue +50% y/y and Mexico revenue +109% y/y).

• GoPay. PYPL completed its acquisition of GoPay earlier this year. While 70% of Chinese payment volumes are un-addressable, that still leaves 30% of the nearly $2tn Chinese market available. China is by far the largest digital market, representing nearly 50% of global e-commerce volumes.

• Gojek. PYPL made an undisclosed investment in Gojek in 2020. Gojek has more than 170 million customers in Southeast Asia, processing billions of transactions annually, and owns the largest eWallet in Indonesia. The arrangement will allow PYPL to provide payments and other financial services to the large and growing population in Southeast Asia.

Furthermore, the rise of marketplaces globally provides another opportunity for PYPL to expand both domestically and internationally. Specifically, Barclays estimates that PYPL can generate $1-2bn of incremental revenue by expanding across marketplaces, excluding Amazon and Chinese based marketplaces. This is based on estimated 2021 GMV of $413bn across marketplaces such as: Flipkart, Houzz, Coupang, Allegro, and Kickstarter among many others, with a sensitivity analysis shown below based on take rates and market share.

PYPL Marketplace revenue
Offline Payments

Changing consumer spending habits due to the pandemic have accelerated PYPL’s in-person commerce strategy. PYPL believe it’s offline TAM is roughly 4x its online TAM, and most of the $8tn of offline retail is excluded from Credit Suisse’s estimate above of PYPL’s TAM.

In 2020, PYPL only captured $20bn of in-person TPV in 2020 (~2% of total TPV) across its payment instruments including PayPal-issued cards and QR codes, and the offline market represents the largest opportunity for PYPL. PYPL has introduced a number of products and services aimed at the offline market including: BNPL, Crypto, QR Codes, and rewards.

PYPL 2025 Retail TAM
In the U.S. alone, 2020 offline retail sales (ex motor vehicles and non-store retailers) were roughly $4tn. Shown below is a sensitivity analysis of potential operating income based on market share gains and operating margins, assuming a 2.3% take rate. The higher-than-average take rate is based on the fact that PYPL’s overall take rate and margins are pressured by Venmo and Braintree. As shown below a 3% market share in 2025 would represent $3.4bn of revenue and $1.0bn of operating income. For context, PYPL generated $3.3bn of operating income in 2020.

PYPL offline retail

Let’s look at some of the in-person opportunities for PYPL:

Buy Now Pay Later (BNPL)

PYPL launched its BNPL offering in August 2020, which allows consumers to purchase goods and services now and pay for those goods over 3-4 bi-weekly payments. There are no fees or credit risk for the merchant, and there is no embedded interest rate or fees paid by the consumer except for late fees. This is a relatively small product offering for PYPL.

In just the 4th quarter alone, BNPL generated $750M volume ($3bn annualized), across 250K merchants, and 2.8M consumers. For BNPL, the company has already signed up ~250,000 unique merchants and launched across 3 countries (US, UK, and France). Within the US, these merchants experienced a ~12% increase in weekly TPV and transactions after adopting the BNPL feature. PYPL competes with Afterpay, Affirm, Klarna, etc. The company noted that they are witnessing a 10% increase in their branded share of checkout when merchants opt to use BNPL.

Broadly, BNPL represents a large opportunity for payments companies in the U.S. with a 1.6% share of checkout currently, which is much lower than in many other countries. Strong growth is expected given the numerous benefits for consumers and merchants.

BNPL market share

For PYPL, BNPL could conservatively add $1.3bn. of revenue by 2025.

QR Codes

In 2020 PYPL launched QR codes in 28 markets and limited to developed countries where card usage is high but strong in regions with fewer cards and high smart phone penetration such as Asia and Latin America. The company announced ~600k small businesses are using QR codes to transact today, and that, in addition to CVS, more large enterprises are expected to launch QR codes later this year.

Currently, QR code penetration ranges from 8% in North America to 13% in Latin America and 15% in Asia. Furthermore, U.S. contactless mobile volumes are expected to increase from $100bn in 2019 to $250bn in 2023. PYPL’s strategy entails integrating merchant rewards and Honey coupons, and early results show a 19% increase in engagement from customers using QR codes.

As shown below, PYPL could generate $2.9bn of QR-code revenue in 2025 based on 245mn app users, a 14% adoption rate and a 2.4% take rate. Apply Pay adoption is currently around a 30% adoption rate, so a 14% adoption rate by 2025 seems reasonable. However, QR Codes compete with NFC technology embedded in Apple and Android phones, so PYPL needs to add additional incentives for consumers to adopt QR codes, such as offering rewards at the point of sale. Notably, PYPL introduced QR codes back in 2013 but failed to gain much traction.

PYPL QR Code Revenue

Venmo rewards

Additionally, PYPL is offering rewards at the point of sale through Venmo. Cash rewards are returned to customers account within 7 days for in-store transactions and within 60 days for online transactions. In 4Q19 Venmo partnered with several large merchants to offer 4-5% cash back offers. In addition to receiving cash back, consumers benefit from the customized nature of rewards. Consumers can filter through a variety of rewards before selecting a merchant. Merchants benefit from a rewards programs as they can engage directly with potential customers through geographically targeted and personalized cash-back offers and is a great way to create loyalty with consumers.

As mentioned, PYPL also plans to create an improved shopping experience for consumers. Building on the Honey Acquisition, PYPL’s shopping hub will curate relevant offers and deals, and consumers will be able to build wish lists, monitor pricing, and receive personalized offers, all tied to universal checkout, which should attract merchants.

From PYPL’s 2021 Investor Day:

“We will have hundreds of millions of consumers building their own wish lists, their own demand curves that merchants can access so that they can give them customized, personalized offers and deals. We will provide the ability for consumers to do price monitoring, to get rewards and for our platform to be a universal checkout so that you don't, as a consumer, need to go from one website to another, figure out different payment instruments but do everything from one place.”

iZettle expansion

PYPL may be able to accelerate offline market share gains by expanding its relationship with merchants through iZettle, as QR codes and other online payments capabilities have been integrated into the platform. iZettle is currently focused on Europe, and PYPL plans to expand its iZettle POS product to the U.S. later in 2021, to the more than 47% of merchants who lack an online presence.

iZettle provides point of service hardware and software in addition to tools such as order management, inventory management, and accounting services for merchants. PYPL will compete against a number of other vendors including Square, Clover, and Lightspeed, but PYPL benefits from its substantial number of customer accounts and digital offerings.

Financial Services

PYPL has also rolled out a number of financial services to its users including the Venmo Credit Card, Instant Deposit, Bill Pay, crypto and remittances through Xoom. The Venmo credit card has already been rolled out to 100% of Venmo’s 70M user base in 2021. Many of these services are aimed at disintermediating retail banking functions, given PYPL’s trusted brand and strong technology.

This model has already been proven out in China, where AliPay and WeChat Pay have disintermediated large parts of the banking system. Those apps function largely like a bank for many consumers, taking direct deposits, and being used for e-commerce payments, offline payments, and P2P payments.


PYPL launched its crypto offering in October 2020, allowing consumers to buy, hold, and sell crypto on the PayPal app, and recently launched the ability to buy, hold and sell crypto on the Venmo app. Crypto trading revenue could eventually become additive to earnings. BAML estimates PYPL crypto trading revenue could add $123mn of revenue in 2021, although there is a very wide range of values driven by limited disclosures provided. Given expected operating margins of 40%, crypto trading could add 1% to EPS growth as well and could become more material over the long term. PYPL also recently announced the acquisition of crypto custody provider Curv, expected to close in 1H21.
PYPL crypto trading revenue

PYPL also recently launched checkout with crypto which allows users to instantly convert their crypto to dollars with no additional fees, and then PYPL completes the transaction. If the merchant doesn’t take USD, PYPL will convert those dollars into the local currency. This offering will also help PYPL compete for in-person payments, as users can’t pay with crypto using traditional credit/debit cards or digital wallets from Apple, Google, Samsung. However, I don’t expect a meaningful number of consumers to pay with crypto given the taxable nature of crypto transactions. In addition to driving merchant adoption, crypto helps to drive consumer adoption and engagement. PYPL noted that 50+% of crypto holders log in to their account every day.


The global remittances market is massive, with an estimated TAM of $700bn. Currently remittance fees are extremely high, averaging 7% globally with slow delivery times. PayPal’s Xoom allows customers to transfer money online or through a mobile device from the United States to over 100 countries and to make cross-border bill payments from the U.S. to other countries. Remittances TAM

Remittances is still a small category for PYPL, with 2020 TPV of $22bn representing $501mn of revenue. However, given the market size, PYPL only has a ~3% market share, implying a  substantial opportunity for PYPL to take share given how much lower its fees are than alternative products such as Western Union or bank transfers.

PYPL remittance TPV

Payout capabilities for gig economy workers

PYPL also offers a number of financial services aimed at the under-banked/gig-economy including fast payouts through Hyperwallet. Specifically, PYPL allows merchants to provide payouts across a variety of payment options, and provides features such as payout history, tax reporting, and payee support. As mentioned, PYPL invested $500mn in Uber prior to its IPO in 2019, and PYPL is Uber’s leading payment provider. There are likely other opportunities for PYPL to partner with gig-economy platforms such as DoorDash, AirBNB, TaskRabbit, etc.

JPMorgan recently estimated a $10.5bn revenue TAM for new-age banking products for individuals who are un-banked, under banked, or work in the gig economy. JPM estimates that the gig economy represents $700bn spend, and an $8.1bn revenue opportunity across a variety of new-age banking products and services including P2P payments, direct deposit, credit needs, and payouts.
New age banking revenue TAMRisks

Substantial competition across e-commerce and Offline Payments


Despite its prominence in e-commerce PYPL faces meaningful competition. For example, EMV Secure remote connection (SRC) is a potential online checkout competitor supported by the networks, to take the place of Visa Checkout, Masterpass, and Amex Express Checkout. While it is a risk for PayPal, the more likely audience is probably consumers currently using credit cards given that 43% of global e-commerce and 66% of U.S. e-commerce is done via card.

There is also competition from other checkout options, including vertical specific payment players such as Toast in the restaurants space. Additionally, Google Pay has become a more prominent checkout option as well. In some cases, PYPL is still the underlying payment system, but in other cases consumers will link a bank account, or debit/credit card to their Google Pay or Toast order, bypassing PYPL.

Offline Payments

PYPL faces even more competition in offline payments, given the numerous alternatives such as cash/checks, credit/debit cards, and a variety of mobile wallets (Apple, Google, Samsung) which are mostly built on top of credit and debit cards. As mentioned, only 2% of PYPL’s current TPV is from in person payments. To take market share, PYPL will need to incentivize consumers to shift their payment method of choice, which is a challenging endeavor. Recently launched products such as shopping, rewards/QR codes, BNPL, paying with Crypto, and Venmo debit and credit cards are all aimed at in-person payments.

As shown below, Digital/Mobile Wallets are expected to take meaningful market share through 2024, largely from Cash, with Credit/Debit Cards remaining flat.

Global POS methods


PYPL currently trades at a 59x consenus 2021 EPS and 47x consensus 2022 EPS. However, the company also expects to generate significant FCF over the next five years as noted above. Given the current high multiples, PYPL will need to sustain close to 20% annual EPS growth over the next decade, while maintaining an EPS multiple of at least 30x to generate attractive returns for investors. Based on my estimates, PYPL should generate 9-12% IRRs over the next 5 years. A 30x terminal multiple in 2026 translates to a 9% IRR, and a 35x terminal multiple translates to a roughly 12% IRR. PYPL is not cheap at its current valuation, and I view the company as more fairly valued currently.

However, I do believe the company has substantial optionality and investing in PYPL at its current valuation is an explicit bet that management can execute on their offline strategy and meaningfully penetrate various financial services. Management has executed extremely well since 2015, and I like the strategic direction the company is headed in. While PYPL’s core e-commerce business should continue to grow at 10+% a year for many years to come, PYPL will need to expand into these adjacent markets (offline payments and financial services) to justify the current valuation.


 PYPL Financials


This article is not to be taken as financial advice and is not recommending the purchase or sale of any particular securities. This information is meant merely for informational and discussion purposes only. Please do your own research or seek out a licensed financial professional for help with personal finance and investment decisions.

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