PayPal (PYPL)

PayPal (PYPL)

Summary:  ON SALE

Score:  14/20

MOS:  80%

Share Price:  $288

Sticker Price:  $1,450

Is PayPal a good buy?

PayPal was established in 1998 and is based out of San Jose, CA.

Have you ever heard of the “PayPal Mafia”?  This refers to the individuals who were part of PayPal in the early days and went on to establish other highly successful businesses.

Before we review the roster, here is the PayPal backstory.

PayPal was originally established by Max Levchin, Peter Thiel, and Luke Nosek under the name Confinity. The company was originally focused on software security for handheld devices. They had no success with that business so they pivoted to a digital wallet. In 2000, Confinity merged with X.com, an online banking company founded by Elon Musk. Later that year, Elon decided to terminate other X.com operations and place his attention on PayPal. In that same year, Elon replaced Peter Thiel as CEO of X.com and in 2001 renamed the company to PayPal. In 2002 PayPal went public at the share price of $13.

Below is the original roster. A dream team of future tech leaders.

  • Peter Thiel: Co-founder of Palantir in 2004 which went public in 2020. Co-founded Founders Fund, a VC firm, and was the first investor in Facebook. Other notable investments include SpaceX, Stripe, airbnb, Spotify, Twilio, and Lyft.
  • Elon Musk: Co-founder of Tesla. Founder of SpaceX, Neuralink, Open AI, and The Boring Company.
  • David O. Sacks: Founder of Geni.com and Yammer.
  • Roelof Botha: Became a partner at Sequoia Capital, a VC firm that has invested in DoorDash, HubSpot, GitHub, Electronic Arts, Instagram, LinkedIn, MongoDB, NEXT Trucking, and more.
  • Steve Chen: Co-founder of YouTube.
  • Jawed Karim: Co-founder of YouTube.
  • Reid Hoffman: Founder of LinkedIn.
  • Ken Howery: Partner at Founders Fund.
  • Joe Lonsdale: Co-founder of Palantir.
  • Russel Simmons: Co-founder of Yelp.
  • Yishan Wong: Become CEO of Reddit.

And that is just the beginning.  There were many other talented individuals that went on to lead successful tech businesses.

PayPal is the #1 rated app for the “War on Cash”. It is used in 200 countries and supports 25 currencies.

PayPal generates revenue primarily through transaction fees. There are no physical products or inventory. 

For those of you who know me, know that I love both B2C and B2B SaaS as these models are monthly recurring revenue but transaction fee models are superior. With transaction fee revenue models, the fees can continuously stack up with no upper limits. It’s also important to emphasize the low friction aspect of transaction fees as consumers and businesses typically accept the fees as the “cost of doing business.” 

Overall, with fee based models you’re not selling a product or service. There is no friction or negotiation in the sales process which is a brilliant business model. You’re simply placing a tool in the hands of consumers and businesses and the more they use the tool, the more money PayPal generates.

In 2020, PayPal released the functionality to buy and sell cryptocurrencies including Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. This is also a fee based revenue model.

But bigger news just announced on August 30th, 2021. PayPal is exploring the ability to allow customers to buy and sell stocks. This is a brilliant move as PayPal already has a global footprint. Creating a global broker can require years of work and a sizable 7 or 8 figure investment. PayPal already has the technical infrastructure to speed up the go-to-market strategy.

This article from cnbc.com outlines the rapid growth of the retail investor segment which classifies us, the users of Tykr. In fact, more than 10 million new retail investors entered the market in the first half of 2021.

This article from marketplacefairness.org also backs up the incredible growth of the retail investor segment. In January of 2020, 17% of investors were retail investors. By July of 2020, that number increased to 25%. By comparison, this article from irmagazine.com says in 2010, only 10% of investors were retail investors.

The same article from marketplacefairness.org states there are over 100 million retail investor accounts on the top 6 broker platforms which include Charles Schwab, Fidelity, TD Ameritrade, and Etrade.

One major reason for more retail investors entering the market is due to Youtube, Podcasts, TikTok, Reddit, and Twitter. People are learning they can invest on their own and investing is actually easier than most people think.

PayPal’s move of adding stocks to its platform has already caused disruption in the market. As soon as this was announced, this article from reuters.com stated that Robinhood’s share price tumbled by nearly 7%. The threat is real and other brokers should be afraid.

Let’s see how PayPal stacks up against the competition:

 

PayPal (PYPL)

Score:  14/20

MOS:  80%

Share Price:  $288

Sticker Price:  $1,450

Available in 200 countries

 

Square (SQ)

Score:  14/20

MOS:  54%

Share Price:  $271

Sticker Price:  $588

Available in 46 countries

 

Adyen (ADYEN)

Score:  13/20

MOS:  80%

Share Price:  €2,749

Sticker Price:  €13,820

Available in 70 countries

 

Now let’s take a look at the 4 M’s.

MOS: The financials are solid. A score of 14/20 is great. When you take a closer look in Tykr you can see the ROIC is 6/6 which is outstanding. Some improvement could be made on the EPS Growth Rate and Cash Flow Growth Rate which justifies the score of 14. As for the MOS, it resides at 80% which shows there is significant upside potential.

Meaning: Cash will someday no longer be used. Digital transactions are the future and PayPal continues to expand its product offering to grow its market share. The addition of crypto was a big win in 2020 and the addition of stocks will also be a big win.

Moat: Both Square and Adyen have solid financials and market share as well. These are two competitors to pay attention to but the global financial market is massive. There is room for both these competitors and more to thrive. FinTech (Financial Technology) is a hot industry that is ripe for growth.

Management: Dan Schulman is the current President and CEO of PayPal. He started his career at AT&T where we climbed the ranks over 18 years. He then moved onto Priceline.com where he first served as COO and eventually became CEO. During his two years at Priceline.com revenues grew from $20M to $1B. After Priceline.com he moved onto Virgin Mobile USA where he served as CEO. By the time he left Virgin, it became one of the nation’s top wireless carriers, with over 5 million customers and $1.3B in annual sales. The rapid growth caught the attention of other carriers and Virgin eventually sold to Sprint Nextel. He then had a short tenure at American Express until he joined PayPal as CEO in 2014. Since his arrival at PayPal, he was instrumental in the crypto offering and he unveiled several social initiatives that have made an impressive impact on the culture. He introduced PayPal’s employee financial wellness initiative to help struggling workers by lowering healthcare costs. He created avenues for employees to receive equity in PayPal to help promote long-term savings. He announced PayPal’s $535M commitment to support black-owned business and minority communities in the US in an effort to close the racial wealth gap. And he also prohibited hate groups from using PayPal’s platform to accept payments and donations. Overall, Schulman has an incredible track record of building businesses and he’s highly focused on social causes. He is a perfect leader for this company.

Now let’s take a look at the financials. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

 

Revenue (Found on the Income Statement)

2017:  $13B

2018:  $15B

2019:  $17B

2020:  $21B

Revenue is increasing consistently which is a great sign.

 

Net Income (Found on the Income Statement)

2017:  $1.7B

2018:  $2B

2019:  $2.4B

2020:  $4.2B

Net Income is increasing consistently which is a great sign.

 

EPS (Found on the Income Statement)

2017:  1.49

2018:  1.74

2019:  2.09

2020:  3.59

EPS increased substantially in 2020. This is a great sign.

 

Free Cash Flow (Found on the Cash Flow Statement)

2017:  $1.8B

2018:  $4.6B

2019:  $3.8B

2020:  $4.9B

Free Cash Flow dropped off slightly in 2019 but jumped back up in 2020 which is a good sign.

 

Total Assets (Found on the Balance Sheet)

2017:  $40B

2018:  $43B

2019:  $51B

2020:  $70B

Total Assets have increased consistently which is a great sign.

 

Total Liabilities (Found on the Balance Sheet)

2017:  $24B

2018:  $27B

2019:  $34B

2020:  $50B

Total Liabilities have increased which is okay. 

 

Total Debt (Found on the Balance Sheet)

2017:  $1B

2018:  $1.9B

2019:  $8.3B

2020:  $8.9B

Total Debt has increased. This is okay as well. This is one reason why the score is 14/20 and not higher. If PayPal can reduce its debts, the score will increase.

 

Total Equity (Found on the Balance Sheet)

2017:  $15.9B

2018:  $15.3B

2019:  $16.8B

2020:  $20B

Total Equity has increased consistently. This is a good sign.

 

PayPal’s financials are strong, especially the ROIC of 6/6. This means PayPal is reinvesting in highly profitable products, one of which includes crypto. With the meaning, it’s impressive to see how PayPal has expanded to serve 200 countries around the world. The addition of crypto has proven to be a profitable revenue channel and the addition of stocks will definitely be another profitable revenue channel. With the Moat, although Square and Adyen are impressive companies on their own, the market is big enough for all three businesses to thrive. With the Management, I’m very impressed with Dan Schulman’s background and the social impact work he’s leading at PayPal. If you’re looking for a tech business to diversify your portfolio, this may be worth a look.

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.

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