Paypal
Hello /r/stockmarket!
This is the next write-up in my addition to this subreddit. This is my own analysis, done through fundamentals and discounted cash flow to determine the net present value of companies, as well as the overall trend of their respective industry. I’ve already done Square inc. ($SQ) and Lending Tree ($TREE), and now continue with my favorite sector, financial technology (fintech). As always, if you would like a copy of my financial model, please message me! I’ll answer any questions right here.
Paypal is a company that works with payments solutions and the transfer of currency (non-crypto), for both businesses and private individuals. Paypal make their revenue from both a steady and % fee on each transaction that they process. The current value of Paypal is 91 billion USD, a quite steep price for a company such as this (a trailing P/E of 51). Paypal has also both started and acquired a basket of payment services, each focusing on different type of transactions.
To name a few:
Braintree payments, a one stop shop online merchant system. Venmo, a peer-2-peer mobile payment system Paydiant, a seamless mobile payment system for businesses. Walmart uses paydiant in their digital systems. Xoom, a remittance company, focusing on far-distance transfers over long distances for emerging markets Modest, a simple payment system for online merchant with focus on ease of implementation
As you can see, they have a clear focus but claim a strong brand within their sector, fintech payments.
** Fundamentals**
Paypal generated 3,7 billion dollars of revenue last quarter, with an average revenue growth of roughly 20% y/y in the last 4 quarters. They have an operating margin around 15-16%, and a net margin of 12-13%. These low margins are very common for payment solution companies, as they handle a huge amount of capital. Speaking of capital, the total payment volume (TPV) is the driving earnings generator for the company is at 131 billion USD, and is increasing 20-30% y/y in the last 5 quarters. Keep in mind that the TPV growth is increasing quarter to quarter. TPV growth is really what drives the business, and the TPV growth and revenue growth has a roughly 76% correlation, where TPV increases a bit faster than the revenue itself. Paypal as of today pays roughly 18% effective tax, making them incredibly efficient turning volume into net profit. It is also worth pointing out that Paypal is debtless, and is 5.4 billion net positive cash in their warchest.
Ebay & War on cash
Paypal is currently down for this year, after they were announced to be dropped from Ebay as the primary payment service, since Ebay want to collect payment fees themselves. This caused a rough 10% drop in the price of Paypal. It is currently very uncertain how much this hurts Paypal, as Ebay payment volume is today 13% of Paypal's TPV. On top of this, something known as the war on cash is going on all over the world right now. If you are not aware of this, for sure do your research if you are interested in payment technology. Right now a majority of the worlds transactions happen through cash, but the % of cash transactions compared to the % digital payment transactions is currently is shrinking, fast. This translates to every single payment company’s market is growing, daily.
Estimates & Result
So following the guidance put down by Paypal in their last ER gives 2018 an TPV growth of 20%, as well as a revenue of 15.000-15.250 billion USD, as well as their past performance, while maintaining margins, we are expected to see an increase in profits with an EPS going from 1.33 in 2017 to 1.6 in 2018. In my usual processes, I try to be conservative. I attempt to capture a conservative scenario that is very likely, and do not expect anything amazing to happen (optimism is not better than realism in the market). I usually see what a company is valued at assuming the company peaked in the last quarter reported. Assuming that their own guidance is correct for 2018, and that slowly their growth will go down after peaking in 2018, their net present value ends up at 82 billion USD, which is 12% less than their current market cap at 91.2 billion USD. This would put Paypal into overpriced ranged. However, there are some interesting things around here. As Paypal's market (the payment market) grows rapidly, there is tons of potential that is hard to calculate fundamentally. If the entire market grows to its full size, which would be roughly by 2/3rds, and Paypal takes a portion of that market share, their growth rate would increase rapidly. A sign of this is their increasing growth in TPV. The model which assumes peak in 2018 leaves their net present stock value at 69.4 USD, a 9% downside to its current valuation. The more optimistic model, which I also find more realistic, is where Paypal have at least 2 more years of growth until they peak. In this scenario they maintain their revenue growth of 17, until 2021, while maintaining margins. After that peak, slowly decline by 2% per year, with a discount rate of 7% (fair I’d say), their net present stock value is at 96 USD, 27% upside.
Conclusion
Paypal is a very tough company to evaluate, one of the hardest I’ve ever analyzed. They are a growth company for sure, but a very expensive one. They are priced at a point where they keep growing without many issues. If you assume peak in 2018, they are overvalued, 20% so pre “correction”, and 9% now. However, assuming payment solution growth companies peaking this year is practically assuming the company's failure. There is not success without additional growth. There is for sure risk there, especially with events like Ebay dropping them (note, it was not unexpected, but bad nonetheless). It’s hard to estimate how much it damages them, if at all, and if similar things will happen when competition with lower prices arise. However, all this said there is so much to like. A debtless company that is top of their respective field R&D-wise, making great profits (even if you are paying quite a bit for that profit at trailing PE of 51). As the digital payment volume increases, paypal will gain a portion of that, which makes Paypal a stable purchase if you want to bet against cash (which is smart). The questions to look out after are for sure:
How does paypal maintain their Revenue to TPV ratio? This number is crucial as they most likely will increase their TPV. One problem might be that they have to lower their fees to compete in the future. How does the competition look? The world if filled with competition, and its truly fierce here. Any provider that is cheaper/as cheap and/or easier/as easy, will out-compete Paypal rapidly. Where is the expected revenue peak? If you assume it 2018 it looks pretty bad, if you assume it later it start looking good fast.
If we see an increase in guidance as well as results in 2018-2019, it will be good enough news to maintain the goal of not peaking before 2020, which would make paypal a 26% upside purchase today.
My take:
I believe in Paypal, however I much more strongly believe in the profitability of the war on cash. I think that if you are not invested in the “war” you are making a huge mistake.
Good places to be include: $V (Visa inc), $PYPL (Paypal) and $MA (Mastercard)$.
I currently own Paypal, it is currently just below 10% of my portfolio. I am down 10% after their earnings and Ebay announcement. The earnings looked better than I expected, and I am very pleased. I plan to average down to roughly 15% of my portfolio, and hold very long term until I can reap the benefits of the transition to a cashless world. I would buy Visa over Paypal, as it comes with less risk. I will make a write-up on them next. I own both, the same amount.
Thanks for reading!
Submitted February 07, 2018 at 03:38PM by lykosen11 http://ift.tt/2EbhEJY
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