PayPal Stock: Payments powerhouse poised for margin growth (NASDAQ: PYPL)


PayPal (NASDAQ: PYPL) is a fintech juggernaut that is poised to increase its profitability after management made it a strategic priority. PayPal’s share price soared more than 200% in 2020 as a stimulus check fueled the consumer and caused a total boom payment volumes. But since September 2021, the stock price has been slaughtered by around 75%, due to slowing growth and the high inflation environment. However, a recovery appears to be in sight as the company announced strong financials and purchased buyout shares in the second quarter. Additionally, management has agreed working with activist investor Elliot Management, which should help increase long-term returns for shareholders. In this article, I’m going to dive deeper into business model, finance and valuation, let’s dive into it.

PYPL data by YCharts

Evolving business model

Founded in 1998 by the “PayPal Mafia” which includes an all star team of Silicon Valley legends such as; Peter Thiel (early Facebook investor), Max Levchin (founder of Affirm) and even Elon Musk (X.Com merged with PayPal). In the early days of the Internet, one of the biggest barriers to mass adoption of e-commerce was “secure” online payments. For those who remember, at the time there was great fear of using your credit card directly online. PayPal solved this problem and has since evolved to serve more than 430 million consumers and merchants worldwide. At the time of writing, the company processes over $1.31 trillion in total payment volume.

PayPal business model

PayPal Business Model (Investor Overview)

PayPal has grown its business through a variety of acquisitions over the past decade. These include Venmo, the Social Payments app, acquired in 2012, Braintree, the payment gateway acquired in 2013, and Zettle, the merchant point-of-sale (POS) provider acquired in 2018. Regarding acquisitions, these three have helped to significantly expand PayPal’s business and have been boosted by the pandemic.

For example, PayPal has a strong relationship with Grubhub, the online food delivery network, which has exploded during the pandemic. 95% of all GrubHub transactions are processed through PayPal’s Braintree platform. While Paypal’s “Hyperwallet” allows Grubhub drivers to receive an “Instant Withdrawal” of their payments.

PayPal also rolled out new credit offerings for small and medium-sized enterprises (SMEs) in the second quarter of 2022. These include a working capital expansion in France and the Netherlands. In addition to a PayPal Business Cashback card in partnership with Mastercard for US residents. This gives them a substantial 3% cashback when paying with PayPal.

The company has also launched crypto transfers between PayPal and other exchanges. Also, introduce a cost-free send/receive process for friends/family in the US, as they hope to increase the popularity of the service.

Buy Now Pay Later (BNPL) services have grown in popularity with Affirm, Klarna and many others. PayPal has expanded its offering with a monthly payment service for those in the United States. Although I think they were very sluggish compared to the aforementioned nimble competitors.

Ebay breaks with PayPal

PayPal is “breaking away from eBay” as the e-commerce provider plans to switch to native payment integration through competitor Adyen. However, eBay has agreed to keep PayPal as a payment option for customers until July 2023. The loss of eBay is a blow to PayPal and it’s not just about lost payment volume. In my eyes, the loss of eBay is a black mark on PayPal and how transparent or expensive it is as a payment service. Having used PayPal a number of times in the past, I think this system is good because it “works”, but the interface feels clumsier than others in my opinion.

Growing finance

Paypal delivered strong financial results for the second quarter of 2022. Total revenue was $6.8 billion, up 9% and 10% currency neutral year over year. ‘other. It also beat analysts’ expectations of $21.58 million. If we exclude eBay, revenue grew 14% over a 3-year CAGR.


Revenue (Q2 PayPal report)

Transaction revenue was up 8% year-over-year, primarily driven by the Braintree product. Revenue from other value-added services (OVAS) increased 21% year-over-year. The total “take rate” (which is the percentage of money PayPal takes per transaction) has remained stable year over year. Venmo and the P2P mix benefited, but this was offset by eBay’s lower volume/yield and lower exchange fees. PayPal has smartly implemented derivative hedging for volatile exchange rates, which they say will result in hedging gains of $372 million in international transaction revenue over the next 12 months.

Total payment volume (TPV) jumped 9% year-over-year to $340 billion. If we exclude eBay, TPV actually increased by 11%, which is a positive sign. eBay volumes fell 39% as the company removed PayPal as its main payment method, but will still offer it as an alternative until July 2023.

Venmo volume grew 6% year-over-year to $61 billion, which isn’t hugely significant, but keep in mind that’s on top of 58% growth at Q2.21.

Total payment volume

Total payment volume (Q2 PayPal report)

Total active accounts grew 6% year-over-year to 429 million. This account growth was driven primarily by Venmo.

Active accounts

Active accounts (Q2 PayPal report)

Total spending climbed 20.1% year over year to $5.5 billion. This was driven by a surge in volume-based spend, which jumped 29.7% year-over-year. This is due to increased financing costs, driven by the growth of non-branded processing. Non-transaction spending was up just 6.4% year-over-year as the company focused on controlling costs across all segments.

Overall operating margin (GAAP) declined approximately 684 basis points to 11.2%. This resulted in GAAP EPS of minus $0.29, which was worse than $1.00 in the second quarter of 2021. GAAP EPS included a negative impact of approximately $0.37 related to a “discreet” tax charge acquired intellectual property. Additionally, to a net loss of -$0.45, driven by a drop in PayPal’s marketable securities. This is a common trend I have seen in many earnings reports as rising interest rates have squeezed the valuations of many companies.

If we adjust for these prior expenses, EPS on a non-GAAP basis was $0.93, which beat analysts’ low expectations of $0.06. However, it should be noted that this was still down from the $1.15 in Q2’21.


EPS (Q2 Report)

The company’s operating cash flow jumped 12% year over year to $1.5 billion. Additionally, its free cash flow (FCF) jumped 22% to $1.3 billion, driven by higher cash earnings and positive changes in working capital.

Free movement of capital

Free Cash Flow (PayPal)

PayPal has a strong balance sheet with $15.6 billion in cash, near-cash and short-term investments. In addition to a total debt of 10.6 billion dollars.

Management showed confidence in the second quarter and repurchased 8 million shares, bringing in $750 million for shareholders. Its board also authorized $15 billion in share buybacks, bringing its total buyback capacity to $18 billion.

strong orientation

For the full year 2022, management expects revenue of $27.85 billion, with net revenue up 10% year-over-year. Earnings per share are also expected to be strong at $3.87-$3.97 (non-GAAP) as CEO Dan Schulman showed confidence.

“We expect operating margin expansion beginning in the fourth quarter of this year and continuing into 2023,” PayPal CEO Dan Schulman said on the second quarter earnings call.

Advanced Assessment

In order to value PayPal, I incorporated the latest financial data into my advanced valuation model which uses the discounted cash flow method. I have projected a conservative revenue growth of 10% per year over the next 5 years. Driven by management advice and the growing Fintech market.

PayPal Share Valuation 1

PayPal Stock Valuation 1 (created by author Ben at Motivation 2 Invest)

I also forecast margins to grow to 23% over the next 7 years, driven by management’s focus on expanding margins and greater economies of scale. To increase the accuracy of the valuation, I capitalized the company’s R&D expenses.

PayPal Action Valuation 1

PayPal stock Valuation 2 (created by author Ben at Motivation 2 invest)

Given these factors, I get a fair value of $112/share, the stock is trading at ~$99 at the time of writing and is therefore undervalued by around 12%.

As an additional data point, PayPal is trading at a price-earnings ratio (PE) (FWD)=25, which is 37% cheaper than its 5-year average. It is also one of the most profitable fintech companies in the market, as I compared it to Block (SQ) on the chart below. PayPal also trades at a price-to-sales ratio = 4.1, which is about 49% cheaper than its 5-year average.

PYPL PE Ratio (forward) data by YCharts



High inflation and rising interest rates burden both the consumer and traders with higher input costs. Therefore, if people have less excess funds to spend and reduce their spending, this will have a direct impact on PayPal’s revenue, as they earn money by taking a percentage of the total payment volume.

Has PayPal lost its innovation?

As I mentioned at the beginning regarding the PayPal and eBay split. I think PayPal isn’t as innovative as other companies in the payment space such as Square (now Block) (SQ), I think complacency may have gotten the better of them when it comes to the rollout of new features and innovations, such as Buy Now Pay Later and Crypto.

Final Thoughts

PayPal is a fintech juggernaut that has continued to dominate over the past few decades. The company grew through acquisition and nabbed treasured gems like Venmo, which helped the brand stay in touch with younger generations. After the substantial stock price crash, it is still undervalued and given the growth of the industry, it looks like a great long-term play due to their trust mark.