PayPal (NASDAQ: PYPL) is one of the largest fintech companies in the world. The global fintech-as-a-service market is expected to reach $681.6 billion by 2028 and grow rapidly by 16.9% annually assess. PayPal is poised to continue benefiting from this growth trend and its Venmo app increased commerce volumes by 150% in Q3 22.

Management is executing a series of cost reduction initiatives in an exceptional manner and is on track to save $900 million during the year. The company also repurchased a staggering 10 million shares, returning $939 million to shareholders in the process. In 2022, the company executed $3.2 billion in share buybacks, which is nothing short of amazing.

Despite this great progress, PayPal’s share price has been slaughtered by 70% from its all-time highs in August 2021, mainly due to rising interest rates. So, in this article, I’m going to break down the company’s financials in detail before revealing its valuation, let’s dive into it.

Data by YCharts

Third quarter results

PayPal delivered strong financial results for the third quarter of 2022. Revenue was $6.85 billion, up 11% year-on-year (12% currency neutral) and exceeded expectations analysts of $29.98 million. This revenue is the result of a strong total payments volume (TPV) of $337.0 billion, which grew 9% year-over-year or 14% on a neutral FX basis .


PayPal (third quarter results)

PayPal’s P2P app Venmo continues to drive strong growth across the business portfolio. The platform has nearly 90 million active accounts. Total payment volume for Venmo grew 6% year-over-year, while its commerce volumes grew 150% in the third quarter of 2022. The Venmo app is part of a new wave of millennial banking apps disrupting traditional apps. financial institutions. The app’s tagline is “Simple, Social Payments” and a popular use case is splitting a bill among friends over dinner, which can often be a tricky situation. You can also send “gifts” to friends and even add emojis to make payments more fun and less mechanical.


Venmo (Official site)

Other companies have similar fast-growing financial apps such as Cash App by Square (now Block), SoFi App, Revolut (Europe), and more. Revolut is an interesting case study, the UK-based company was founded in 2015 and reached 300,000 users within the first year of launch. A few years later, Revolut has over 15 million monthly active users, which is still around a quarter of Venmo’s 57 million monthly active users, but Revolut is now expanding into the United States. In 2009, Braintree acquired Venmo in 2012 for a whopping $26.2 million and the platform was later acquired by PayPal. Venmo also appears to have more monthly active users than Cash App by Block, which has around 44 million active users. [MAU]. Therefore, it is safe to say that Venmo is the market leader in Fintech applications, at least in the United States. In Latin America, Warren Buffett-backed NuBank is the region’s biggest fintech app.

All of these financial apps have generated amazing growth, and that has been further accelerated by pandemic-era stimulus checks. I believe that despite the competition, there is a big enough market opportunity. For example, a social media platform like TikTok has 1 billion monthly active users, so Venmo’s 57 million MAUs are small by comparison, and given that most people will need to make payments at a At any given time, the potential for growth is enormous.

PayPal is also constantly innovating in the Venmo app. The company recently began integrating charities, which should drive engagement through a “wellness” charitable giving mechanism, which is particularly popular with millennials. This should be particularly powerful as we enter in the holiday season. Venmo has also entered into an incredible partnership with e-commerce giant Amazon, which will offer Venmo as a payment option by Black Friday on November 25th.

The platform is also rolling out Apple’s tap-to-pay feature with PayPal and Venmo. This will allow PayPal merchants to use their iPhone as a point-of-sale terminal to easily accept payments from customers. It’s also great for freelancers, those selling items on Facebook Marketplace, and those doing “Garry Vee-style” garage sales.

PayPal jumped into bed with Apple, which is quite surprising, but it also makes sense to give Apple ownership of the App Store and the IOS operating system. PayPal will offer an Apple Pay option to its unbranded check streams. Additionally, PayPal and Venmo will be able to be added to an Apple Wallet by the first half of 2023. This is a game-changer and should further boost adoption by the platform.

In October 2022, PayPal launched its rewards program which will unify its legacy rewards program and Honey (acquired for $4 billion in 2020). Honey is a browser extension that saves customers time by finding discount coupons for them at the checkout of an e-commerce store. I think the concept of the app is great, however, in practice, I haven’t seen any benefit from the extension in my personal experience. I think PayPal overpaid the platform ($4 billion is a lot for a browser extension), but I think the company wanted its 17 million monthly active users. PayPal’s global rewards program is under development, and the company has a roadmap of product iterations.

Profitability and expenses

PayPal generated $1.15 in earnings per share in the second quarter of 2022, which beat analysts’ estimates of $0.53. Non-GAAP EPS was $1.08, which exceeded the midpoint of the company’s guidance.

Management has made it a strategic priority to reduce PayPal’s cost structure and stay on track to save more than $900 million in operating and transaction expenses in 2022. In 2023, the company expects to do even better and save up to $1.3 billion through improved efficiencies. This in turn should lead to at least a 100 basis point improvement in operating margin.

PayPal Earnings

PayPal earnings (Q3 earnings)

Free cash flow was $1.8 billion in Q3 2022, which was up 37% year over year and is a record (excluding acquisitions).

Management shocked analysts by raising its forecast, despite the macro environment (more on that in the Risks section). Fourth quarter earnings per share are expected to grow between 6% and 8%. The company also has a strong balance sheet with a staggering $16.1 billion in cash, cash equivalents and short-term investments. Additionally, the company has a total debt of $10.7 billion.

Advanced Assessment

In order to value PayPal, I incorporated the latest financial data into my advanced valuation model which uses the discounted cash flow valuation method. I projected revenue growth of 10% for next year and 10% per year for the next 2-5 years. This is quite conservative considering the new partnership with Amazon, the new rewards program, and the growing adoption of Venmo.

Valuation of Paypal shares 1

PayPal Share Valuation 1 (created by author ben at Motivation 2 Invest)

I forecast that the company will increase its operating margin to 23% over the next 7 years, which is the software industry average. I believe this is achievable given the aforementioned cost reduction initiative management plans to be executed. Note that this includes an adjustment for R&D expenses which I capitalized and this boosted the operating margin.


PayPal (created by author Ben of Motivation 2 Invest)

Given these factors, I get a fair value of $118 per share, the stock is trading at ~$91 per share at the time of writing and is therefore undervalued by around 23%.

As an additional data point, PayPal is trading at Forward P/E = 22, which is 43% cheaper than its 5-year average. The majority of its Fintech competitors are not profitable and therefore difficult to compare on the basis of PE ratio. However, PayPal has a price to sales ratio = 3.779 which is in line with the industry, but remember that revenue is what matters, especially in the current environment.

Data by YCharts


Recession/decline in payment volume

High inflation and rising interest rates have led many analysts to forecast a recession. Higher entry costs for consumers generally lead to lower spending and therefore lower payment volume for payment providers.

Final Thoughts

PayPal is a legacy fintech company still building on its landmark acquisition of Venmo. Management is executing solidly, cutting costs and building partnerships. Given these factors, the total addressable market is large and the stock is undervalued, PayPal appears to be a long-term winner assuming it can continuously innovate.

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