Understanding Three Crucial Points if You Invest in PayPal Shares Right Now
Since its establishment over two decades ago, PayPal (PYPL dropping by 5.84%) has established itself as a leading figure in the digital payments sector. However, investors have been left disappointed in recent years.
PayPal's shares are currently trading around 70% lower than their peak in 2021, despite a 40% surge in the last four months. Given this combination, you might be considering this financial technology (fintech) stock as an investment option. But before making this decision, there are three factors you need to know.
PayPal's Operational Segments
While most investors are familiar with PayPal as a digital payments giant, it's essential to understand the intricacies of its operations.
PayPal's branded checkout solution is responsible for 27% of the total transaction volume on its platform. Recently, PayPal sealed a deal with Shopify that allows merchants using its popular e-commerce platform to incorporate this service into their websites.
In 2013, PayPal acquired Braintree for $800 million and integrated it into its ecosystem as its merchant-oriented solution. Last quarter, Braintree's total transaction volume grew by 11% annually, surpassing PayPal's overall growth rate. Braintree, which provides unbranded payment solutions, competes directly with Adyen and Stripe.
Following the Braintree acquisition, PayPal also acquired the popular peer-to-peer payment app, Venmo. Venmo processed $75 billion worth of transactions last quarter. Management aims to increase the monetization of this segment and has promoted Venmo debit cards and the Pay with Venmo feature.
At its core, PayPal's objective is to "revolutionize commerce globally."
PayPal's Financial Standing
Despite its stock's performance over the past few years, PayPal is a financially stable entity. Any payments company that achieves scale can be highly profitable, and PayPal certainly fits this bill.
PayPal consistently records profits, with an operational margin typically between 15% and 20%. Recently, there's been improvement, with the operational margin rising from 16.9% in Q3 2023 to 18.8% in Q3 2024.
Management prioritizes reinvesting earnings into growth initiatives, primarily focusing on product improvements to boost user engagement. This high profitability results in significant free cash flow (FCF), with a forecast of $6 billion in 2024. The leadership team intends to use all of it to repurchase shares, thereby increasing the value of each remaining share.
PayPal also has a strong balance sheet. As of September 30, 20XX, PayPal had $16.2 billion in cash, cash equivalents, and investments, more than covering its $12.4 billion debt. Investors should appreciate businesses that generate consistent FCF and maintain net cash positions, as it significantly reduces their financial risk.
PayPal's Current Valuation
From its spinoff from eBay in July 2015 to its all-time high in July 2021, PayPal's shares skyrocketed by 740%. Over this period, they outperformed returns from index funds tracking the S&P 500 or Nasdaq Composite.
However, since reaching the peak, the stock has seen a downturn. At its lowest point last year, it was down by over 80% from the peak. PayPal's shares now trade at a forward P/E ratio of about 18, offering an attractive entry point for prospective investors.
Given its positive attributes, it's natural to wonder why its valuation isn't higher. Market concerns may lie in the possibility of PayPal's growth rate slowing post-pandemic as shoppers return to their pre-COVID buying habits. Investors may also be wary of the highly competitive digital payments landscape.
However, PayPal continues to report strong revenue and total transaction volume growth, and its presence in electronic payments spans over two decades. These factors should instill confidence in its future potential.
After considering PayPal as an investment option, you might be interested in allocating some of your money towards its financially stable company, given its consistent profits and high operational margin. As PayPal aims to revolutionize commerce globally, its various segments, such as Braintree and Venmo, contribute significantly to its transaction volume and free cash flow.
In light of its promising financial standing and attractive entry point with a forward P/E ratio of approximately 18, investors might consider investing their money in PayPal, taking into account the potential challenges in the competitive digital payments market post-pandemic.
