PayPal Stock Analysis: Can It Recover?

Hi, I'm Jimmy. In this video, we're looking at PayPal. Ticker symbol PYPL. So, we're going to look at the basics of PayPal's industry, the p the basics of their business, and then we're going to jump into kind of what the company is doing and why the company is struggling a bit. Recently, you can see that the stock kind of jumped up. There was rumors that they were going to get bought out by Stripe and that group and then it those rumors turned out not to be true. It pulled back a bit. We'll come back to this in a minute, but for now, let's jump in and look at the broader industry just so we have an idea of kind of what PayPal's trying to do. Okay, now here's the basics of how this works. A customer walks into a store and they are going to buy an item and they are going to process a credit card or a debit card payment, something like that. So, let's say they're going to process a credit card payment. Well, when they do, there's a whole bunch of steps that have to be taken before the money actually gets to the merchant. This includes companies like Visa or Mastercard depending on what network they're running through. Uh the company's bank, the merchants bank, things like that. Now, as most of us know, there's a fee tied to this whole process. Sometimes it could be one and a half, two and a half, sometimes higher percent fee. So, let's pretend there's a 2% fee. Now, interestingly, and it's probably important for us to remember that the piece of this entire puzzle that gets the biggest fee generally is going to be the bank, the issuers's bank. So, if this is a credit card payment, well, the issuers bank is taking a lot of the risk. So, they're going to get a big cut of that 2% fee, let's say. Now, what PayPal tries to do is they turn around and they try to simplify this process. By the way, this whole image came straight from PayPal's website. So essentially what they're trying to do is simplify the entire process. Now I would point out even in their simplified image here well the the bank is still involved in that whole thing and therefore a lot of the fee ends up staying in place. Now PayPal is able to take different pieces of the fee depending on what transactions they're doing in the top half of this image. They get small cut of that fee. So in theory, the more money that they process, the more transactions that they process, the more of this entire process that they can can that they can control, the more fees that they're going to get. The higher the revenue, the higher their profit, things like that. Now, I did a video on this company about 6 months ago where I was looking at their stock was doing it was right near its low. And one of the things, one of my bigger concerns when analyzing this company is this is already happening in some other countries. And if you think of uh platforms like a zel where you go bank-to-bank transfers, I think that is one of the bigger threats to the industry in general or to what PayPal brings to the table is that it is possible that you go into a store and you swipe your card and your bank talks directly to the merchants's bank. those two t talk directly to each other and they get their money quickly and all that stuff. Now, it's really not as simple as that. I mean, that that technically is not that difficult to pull off. That's already happening with something like Stripe, but where it gets trickier is I buy the product and then you know what, a week later I don't like the product and I'm going to return it. And right now with the way the credit card system is set up, all of that can be rolled back. There's security features in there. There's making sure nobody else is using your credit card, things like that. In this scenario, you'd have to sort out how they're going to do that. So, there is some complications to it. But I do believe that this is a threat to the broader industry. Now with that being said, PayPal is before we jump into look at some of the numbers, PayPal has done some other things to try to expand, let's say their, you know, the the habit of their customers. So one of the things that they pushed out, especially in the UK, is they've pushed out what they call PayPal Plus, which is essentially it's kind of like a membership. You get like rewards and points and stuff like that. And the goal is to try to the way when I was reading about it, they were saying that their goal is to try to get the customers that sign up for PayPal plus to kind of have like change their habit that basically they use PayPal more often. The more often they can use people use PayPal, the more money they can make from a transaction standpoint. So overall, that's that's probably a good sign. Now, it's a bit early to say whether or not this is going to have a meaningful impact on revenue. Early signs point out to this could be good, but it's a fairly and they don't break out a lot of the numbers individually as to how much revenue it's generating and stuff like that, but overall it looks like it's doing fairly decent. Now, another thing that they've recently introduced is advertising on PayPal. Now, this is a screenshot right from their website and it is an interesting concept. So now when you go on your PayPal app or you go on the website or whatever it is, the idea of being advertised, you know, I could see that being a fairly targeted market and there's some potential money to be made there. There's no denying that. Again, they've seen some early signs of success and this is potentially a higher profit margin business which could really help some of their broader numbers because their their broader numbers have been under a bit of pressure. With that being said, let's jump in and look at some key numbers. So, one important number is total payment volume. That's what this chart is. The green bars are analyst estimates for estimated total payment volume going out the next two years. Now, what's interesting when we look at this is total payment volume. As we were just discussing, they're going to get fees based on this total payment volume. Those fees are essentially called their take rate. What is PayPal's take rate? Now, if you didn't want to go and look at the numbers, one quick way to see what their take rate is is to one, look at total payment volume. Two, jump in and look at how their revenue numbers are. Now, if you want to get real interesting, first revenue looking pretty good, climbing higher. But the real problem, I think one of the things that has hurt PayPal stock a lot is this is the growth rate of both total payment volume compared to revenue. Revenue is growth versus total payment volume growth. And we can see over the past handful of years, growth has declined. It is still positive growth. We saw that when we looked at a chart of revenue. We saw that when we looked at a chart of total payment volume. The numbers are in fact increasing, but they are decelerating. they are slowing down with how fast they are growing. And to me, this is sort of a double hit because if you go to their higher growth earlier years, you're going to get a premium for that. Faster growing companies, think about it from a PE perspective. Faster growing companies tend to trade at a higher PE multiple than slower growing companies. Logical, makes sense if we think about it. And now that those numbers are slowing, well, it kind of gets hit because your multiple is going to get hit. that alone will cause a pullback in the stock and earnings per share won't grow nearly as fast. So, you know, there's likely to be some pressure there as well. Now, with that being said, one other important distinction here is notice how the total payment volume growth is faster than the revenue in most every year. Well, what that essentially tells us is that total payment volume is increasing faster than revenue is increasing. But that really means that the take rate is decreasing. So each year for every dollar of a transaction that happens, PayPal is getting a smaller percentage of that. Some of that is because they went after smaller, you know, margin business and now they're trying to switch some of that. They're in the turnaround phase. We're trying to switch to go after higher margin business like advertising and stuff like that. Now, by the way, this isn't a perfectly clean representation because we're excluding things like uh advertising or services, things like that. There's some other fees mixed in here. But either way, the story still holds up. Even with those mixed in here, total payment volume is increasing faster than revenue. So, we know the take rate is decreasing somewhat. Okay, keep that in the back of our mind as we roll forward because it's not all bad news because when we jump over and look at operating profit margin, despite the fact that the take rate is decreasing, they have introduced things like PayPal plus or advertising and additional services, things like that. And that has helped slightly increase operating profit margins over the past few years. Now, this is a decade chart. It's hasn't increased a ton, but better profit margins and better profit margins. So overall, we got to be happy with. And then like we saw in revenue, net income doing fairly good. So net income has a little bit more volatile than what we saw in revenue, but net income has done decent. It has in continued on average to increase. Now, just to make sure we cover all the bases, let's look quickly at a chart of cash and debt. And again, you can see they've get they're doing fairly good. I don't think cash is a real issue for this company. They have some debt. They have enough cash to cover it. Overall, I I'd say that they're about cash neutral as of the most recent numbers. So, overall, I'm not too This is not a company, you know, riddled with debt that this will become a problem. So, I'm more than happy to skip past this and go right over to free cash flow. Okay. So, this is the chart of free cash flow again going over the past decade. And first we can see that this looks very similar to what we saw with net income in that it's a bit volatile but overall the trend has been higher. So this is a good thing. Now interestingly where this becomes more interesting is when we add analyst estimates to this chart. So now this is a chart of free cash flow going back the past decade and forward the next five years. and analysts have it kind of moving sidewaysish. It goes up a little and they have it pulling back. And if anything, I think that this speaks more to the pressure that a company like PayPal is feeling, but not even the company, not just PayPal, but it's also the entire industry. So, this could clearly be an issue. But if we use these numbers and try to come up with a fair value, again, we're doing all this on the Investors Grow website. try to make it quick and easy to analyze companies. So on the investors grow website they take analyst estimates which are provided on the website. Let's adjust this to make a little more room for a gauge chart here which shows us that right now using these analyst estimates and by the way we use a perpetual growth rate of 2.5%. Come back to this in a second. But with these numbers we have a massive amount of margin of safety. This stock is fairly valued at about $91 per share just using these analyst estimates and then a growth rate of 2 and a.5%. Now one of the issues with that is frankly the growth rate of 2.5%. If analysts over the next 5 years are concerned is our assumption that the growth rate of 2 and 12% is that too aggressive? We choose 2 and a half% because that's about the long-term inflation rate. Bit higher right now, but we're saying about they grow with it about the inflation rate. Well, if analysts don't know if that's going to happen and if we don't want to be too aggressive, so maybe $91 fair value is too much. Well, if that's the case, if we were to get rid of that growth rate and knock it down to zero. So now instead of growing like this and growing out at 2.5% now it'll grow at no it will just stay the same forever. Well with that we can see that the fair value dropped from $91 a share down to $74 a share. So 74 bucks a share is still a pretty big upside. So it looks like even with practically no growth in this stock when we estimate almost no growth going out forward go going forward there's still a ton of upside. Now I was curious to see if this held up on another valuation method. So with that being said we pulled down a forward PE multiple and at 9.5x the forward PE looks like it's also undervalued. The 5-year average over the past 5 years is about 15x. It's currently trading at 9 and a halfx. So although I'm not completely sure a company comes in and buys this company out, buys PayPal out, although I do think that some companies this would make sense for. I would think that there's a lot of companies that could target PayPal. I do think that they would be a smart buyout candidate for some companies, for some businesses, even some big businesses like Apple or something like that. You could just buy I mean Apple's so big they could buy them and kind of roll them right into what they're doing. So, I do think that that is possible. But even if we're not sure, to me, this seems like a company that might be worth a decent value investment right now. Now, for me, I do have a very small position. It's like 1% of my portfolio. So, I have a very small position in PayPal that I bought a while back and I like it here. To me, I like it from a value perspective. I I am hesitant to make it too big of a position in my portfolio just because there are legitimate growth concerns here. I like some of the stuff that they're doing. I like the advertising idea. Uh I like some of their they're trying to push out the PayPal buy button on different websites more. I think that there are legitimate moves that they're making, but they're still in the turnaround phase. That's the tricky part about this. This is not this is no longer a growth company. This is kind of a turnaround play at this point. So, I'm more than happy with my small position here, but let me know what you think in the comments below. And if you want to sign up to get access to the Investors Grow website where we try to make it quick and easy to value companies, analyze companies, link right here, link in the description below. Thank you so much for sticking with me all the way to the end of the video. I really do appreciate it. Thank you. I'll see you in the next