00:00 PayPal reported earnings last week and the stock collapsed 15%.
00:04 Shares are down 80% since its all time high which means the company has lost more than
00:09 $270 billion in value.
00:11 Right now the company has a market cap of $71 billion.
00:15 Adjust for cash, investments and debt and the enterprise value is $67 billion.
00:20 Revenue over the last 12 months is $28.6 billion, net income is $4.1 billion and free cash flow
00:26 is $3.6 billion.
00:28 So PayPal is currently valued at 2.3 times revenue, 17 times earnings and under 19 times
00:34 free cash flow.
00:35 That looks cheap, in fact PayPal hasn't been this cheap since 2017 and in 2017 the
00:41 business was producing significantly less.
00:44 For example revenue in 2017 was only $13 billion vs $28 billion today and net income in 2017
00:51 was only $1.8 billion vs over $4 billion today.
00:55 So what's going on?
00:56 The key issue is that PayPal is experiencing slowing growth.
01:00 Revenue growth has slowed from 20% in 2017 to just 8% over the last 12 months and investors
01:07 are concerned about a large number of competitive threats.
01:11 Apple Pay is rapidly increasing its share of digital payments and there are other big
01:16 rivals such as Google Pay, Block, Shop, Zelle, Wise and FedNow.
01:21 Although PayPal posted a 7% increase in revenue in the latest quarter, its number of active
01:27 accounts fell for the second quarter in a row to 431 million.
01:32 Gross margins have also fallen to 41% and the company's take rate which is the amount
01:37 of money it earns per transaction has fallen 2 to 1.7%.
01:42 But there are some positives, activist hedge fund Elliott Management is helping the company
01:46 to reduce costs and return cash to shareholders.
01:50 The company expects to repurchase $5 billion worth of stock this year which could boost
01:55 earnings per share by up to 20%.
01:57 Venmo is still widely used as an app and PayPal's unbranded payment system Braintree drives
02:04 the back end for some large tech companies like Airbnb and Dropbox.
02:09 This segment is lower margin but is showing solid growth in the region of 30%.
02:14 More importantly PayPal has suffered from a general slowdown in e-commerce activity
02:19 after the pandemic.
02:20 When that activity picks up, revenues should rebound.
02:24 But again it won't be easy, PayPal's Braintree segment also faces fierce competition from
02:29 the likes of Stripe and Adyen.
02:31 And with so many businesses wanting to enter payments, perhaps the most logical conclusion
02:36 is a gradual decline in transaction fees across the board.
02:39 Let's assume a simplistic scenario where PayPal can grow its earnings 10% per year
02:45 for the next 10 years then trade at a 25 times multiple.
02:48 In that scenario the company would be worth around $266 billion in 10 years time.
02:53 That works out to an investment return of 13.6% a year which seems fairly reasonable.
02:59 Overall there are clear pressures facing PayPal but the tailwinds for online payments are
03:03 also pretty strong and that should keep the company on the path to growth.
03:07 At less than 18 times earnings I rate the stock a cautious buy but these are my personal
03:12 opinions not financial advice and I hold no position in the stock.
03:16 For more detailed investing ideas make sure to visit our website overlookedalpha.com
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