I am bullish on PayPal Holdings (PYPL) because revenue will likely continue growing, and the company continues using acquisitions as a key strategy for growth. Furthermore, PayPal issued public debt for the first time in 2020, and investors should see this as an accelerant. (See Analysts’ Top Stocks on TipRanks)
Company Overview
PayPal is a digital payment platform. Its solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom, iZettle, and Hyperwallet products. The company was founded in 1998 and is headquartered in San Jose, CA.
Future Outlook
In 2020, PayPal tapped into the public debt market and raised $5 billion. Half of the capital was used to pay down previous debt, and the other half was designated for acquisitions. In 2020, the company saw 21% revenue growth, with growth in 2021 expected to be between 18% – 19%.
As effects from COVID-19 diminish and growth rates in the e-commerce space taper, PayPal’s revenue growth will likely experience a similar decline. While words such as “decline” and “taper” are often linked with poor performance, the company is still growing its revenues at an incredible rate.
Fueled by acquisitions and additional users, PayPal will likely see over 40 million users added by the end of the year. One of the stars in PayPal’s lineup is Venmo. Venmo’s total payment volume grew 36% year-over-year in Q3. While this is lower than its second-quarter growth rate of 58%, Venmo continues to bolster PayPal’s growth.
Acquisitions are a key element to the company’s growth. Recently, the company completed its acquisition of Paidy. Paidy is a two-sided payments platform in Japan. With Japan being the third-largest e-commerce market globally, Paidy represents an expansion into further established markets. It also extends the reach of PayPal and its buy now, pay later solution and continues PayPals relevance in the Japanese payments market.
Based on the recent revenue growth through the pandemic, I estimate growth of approximately 18% through 2022 as the e-commerce market normalizes. Though the decrease in revenue growth is likely inevitable, PayPal’s investment into markets abroad through acquisitions solidifies its long-term growth strategy.
Company Financials
Moving to the financial statements, PayPal has a healthy balance sheet with enough short-term assets to cover its short and long-term liabilities combined. The company holds $13.3 billion in cash and only $8.9 billion in debt.
The company’s revenues grew at a compound annual growth rate of 17.81% from 2014 to 2020, and net margins improved from 12.74% in 2015 to 20.09% in 2020. As revenues grow and margins improve, PayPal becomes more and more profitable. The price-to-earnings ratio rose considerably to a peak of 79.9x in 2020 but has since fallen to 45.3x, the lowest level since 2017.
Valuation
Using a discounted cash flow analysis, investors can see that there is a lot of upside potential. The calculation used in this analysis indicates revenues will hit just under $100 billion by 2030, representing 14.66% average growth annually. Cash flows in the analysis grow at a rate of 11.22% to $18.81 billion over the same timeframe. Capital expenditures are also forecasted to grow significantly.
After discounting the future cash flows by the current weighted average cost of capital of 6.5%, the value of future cash flows indicates a fair value stock price of $309.
Risks
PayPal is growing significantly but is also highly correlated with economic activity. If the world economy experiences a slowdown, PayPal will see negative impacts resulting from fewer transactions.
The digital payment market is highly competitive. Another risk to the company is other competitors in the space finding innovative solutions and gaining market share. While competition is always a risk, PayPal is positioned well to find talent through acquisitions of start-ups and other companies innovating in the digital payment space.
Wall Street’s Take
Turning to Wall Street, PayPal has a Strong Buy consensus rating, based on 25 Buys, five Holds, and one Sell assigned in the last three months. At $272.62, the average PayPal price target implies 46.8% upside potential.
Final Thoughts
PayPal’s platform is a widely used and popular payment processing tool. With the e-commerce market growing and digital payments surpassing cash payments, the company is a top contender in its space.
Although there are overall risks of market downturns and economic slowdowns, Paypal is a well-run company with excellent financial management. I reiterate my bullish sentiment and anticipate price growth over the next year.
Disclosure: At the time of publication, Aaron Stine did not have a position in any of the securities mentioned in this article.
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