➡️ This is a step-by-step stock review to determine if PayPal (PYPL) stock is a good buy. In this article, we’ll help you complete a 4M checklist. The 4Ms include the MOS (Margin of Safety), Meaning, Moat, and Management.
Table of Contents
➡️ Goal: It’s important to know the company’s history. This helps us understand the various revenue streams, if they acquired other companies, how they grew through difficult times, and how they separated themselves from the competition.
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.
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 focus on solely on Confinity. 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 a share price of $13.
Below is the original roster. Essentially 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.
➡️ Goal: When you look at a stock, the first step is to look at the financials. Fortunately, Tykr does this step for us automatically. A stock is either classified On Sale (Potential Buy), Watch (Hold), or Overpriced (Potential Sell). The higher the score, the stronger the financials and the safer the investment. The higher the MOS, the higher the potential returns you can make. To determine if a stock is a definitive “Buy” or “Sell”, it’s wise to complete a 4M checklist.
- Summary: Overpriced
- Score: 44/100
- MOS: 0%
- Share Price: $65
- Fair Value: $80
How does PayPal make money?
➡️ Goal: It’s important to know how a company makes money. A mature business model has multiple streams of revenue which allow the company to weather downturns in the economy.
PayPal is used in 200 countries/territories and supports 25 currencies.
PayPal generates revenue primarily through transaction fees. 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.
Here is a breakdown of PayPal’s services and how the company generates revenue.
Consumer Services
- Buying with PayPal – Free
- BNPL (Buy Now Pay Later) – Pay in 4 installments is free. Monthly payments include interest rates.
- Buying and Selling Crypto with PayPal – Transaction fees
- Accepting donations – Transactions fees
- Sending money to a friend with a bank account – Free
- Sending money to a friend with a credit card – Transaction fees
- Sending money to a friend internationally – Transaction fees
- Currency conversions – Transaction fees
- Withdrawal PayPal balance to the bank (1 – 3 days) – Free
- Withdrawal PayPal balance to the bank (immediately) – Transaction fees
To see detailed PayPal fees for consumers, click here.
Business Services
- Accepting payments with PayPal – Transaction fees
- Accepting international payments with PayPal – Transaction fees
- Accepting BNPL – Transaction fees
- Accepting PayPal QR code payments – Transaction fees
- Accepting PayPal donations – Transaction fees
- Payflow Pro (Payment Gateway) – Transaction fees
- Chargebacks – Transaction fees
- Disputes – Transaction fees
- Currency conversion – Transaction fees
- Accept E-checks – Transaction fees
- Withdrawal PayPal balance to the bank (1 – 3 days) – Free
- Withdrawal PayPal balance to the bank (immediately) – Transaction fees
To see detailed PayPal fees for businesses, click here.
PayPal also owns the following companies
- Venmo – A money transfer service only available in the US
- Buying and Selling Crypto with Venmo – Transaction fees
- Withdrawal Venmo balance to the bank (1 – 3 days) – Free
- Withdrawal Venmo balance to the bank (immediately) – Transaction fees
- Venmo Visa and Venmo Visa Signature cards – Interest rates
- Venmo debit card – Transaction fees
- Venmo Cash-a-Check, let’s users cash their paychecks – Transaction fees
- Xoom – A global money transfer service available in 39 countries. See the full list here. This business generates revenue from transaction fees.
- Braintree – A high-converting digital wallet for businesses located in 45 countries. This business generates revenue from transaction fees.
- Happy Returns – A return service that makes returns beautiful for consumers, businesses, and the planet. The company works with over 5,000 different store locations in the US, Canada, and Europe. The service costs $500/month if you don’t use PayPal to accept payments however the service is free if you do use PayPal to accept payments. This is a strong motivator for businesses to use Happy Returns.
- Hyperwallet – A global mass payment platform available in 92 countries. This business generates revenue from transaction fees.
- Honey – A free chrome extension available in the US, Canada, Australia, and UK that finds coupons for consumers. When a product or service is purchased by a consumer, the business selling the product or service will deliver a commission to Honey.
- Chargehound – A dispute management system that makes handling disputes more efficient for both consumers and businesses. This business only charges a fee to businesses when the business gets paid.
- Paidy – A BNPL platform in Asia. This business generates revenue from transaction fees.
- Simility – A fraud prevention platform for businesses. Fees are not clearly stated on the website.
- Zettle – Zettle sells hardware products including POS (Point of Sale) systems, Card Readers, and Accessories.
➡️ Goal: It’s important to understand who the competitors are and how their financials rank against this company. Try to find 5 other competitors to rank against based on Score. The best way to find competitors is to Google “XYZ competition” and replace XYZ with the company name. You can also go to Tykr and click on the “Similar Stocks” tab on each stock to see similar companies in the same industry.
PayPal (PYPL)
- Summary: Overpriced
- Score: 44/100
- MOS: 0%
- Share Price: $65
- Fair Value: $80
- Available in 200 countries and territories
- Revenue: $27.5B
Block (SQ)
- Score: 50/100
- MOS: 0%
- Share Price: $59
- Fair Value: $76
- Available in 9 countries
- Revenue: $17.5B
Adyen (ADYEN)
- Score: 72/100
- MOS: 90%
- Share Price: €1,415
- Fair Value: €7,112
- Available in 62 countries
- Revenue: $8.9B
Mastercard (MA)
- Score: 72/100
- MOS: 0%
- Share Price: $385
- Fair Value: $371
- Available in 210 countries and territories
- Revenue: $22.2B
Visa (V)
- Score: 67/100
- MOS: 0%
- Share Price: $233
- Fair Value: $372
- Available in 200 countries and territories
- Revenue: $29.3B
American Express (AXP)
- Score: 72/100
- MOS: 0%
- Share Price: $153
- Fair Value: $181
- Available in 200 countries and territories
- Revenue: $52.8B
Ranking based on Score
- Adyen – 72/100
- Mastercard – 72/100
- American Express – 72/100
- Visa – 67/100
- Block – 50/100
- PayPal – 44/100
➡️ Goal: It’s important to understand who the CEO is, what they have accomplished in the past, and how they have helped this company grow. As investors, we should invest in CEOs with humility and integrity. Good leaders typically have stronger cultures, less turnover, better returns in the stock market.
The new CEO has been announced!
Alex Chriss will take over as PayPal CEO on September 27th, 2023.
His experience includes 19 years at Intuit in roles including:
- EVP and General Manager, Small Business and Self-Employed Group
- SVP & Chief Product Officer, Small Business
- Vice President and General Manager
- Director, Inuit Partner Platform
- Business Leader, Intuit Partner Platform
- Group Manager, Business Development & Channel Sales, QuickBase
He was the key driver behind the acquisition of Mailchimp.
➡️ Goal: It’s important to highlight important company-specific news as well as industry-specific news over the last month and year. We don’t need daily news on a company to make buy or sell decisions because we’re investors, not traders. Overall, we want sufficient news to understand where a company and industry are heading over the next year or few years.
Here is the Q2 2023 earnings transcript.
- They matched their earnings estimate of $1.16.
- 8% revenue growth.
- 5% transaction revenue growth.
- Total Payment Volume (TPV) grew by 11% last quarter.
- Passwordless payments are a growing area of the checkout process.
- Venmo is the biggest area of growth.
- They have 60 million monthly active users on Venmo.
- They expect Venmo TPV to increase in Q3 and Q4.
- Add 27 new merchants that accept Venmo including xBox, GoFundMe, Amazon, Amazon Prime, and McDonald’s.
- Tap to Pay is live on both iPhone and Android.
This video from CBS News states that PayPal is launching a new stablecoin called PayPal USD (PYUSD). PayPal USD is backed by the US Dollar. Some key details with PayPal USD include:
- Transactions will be taxed, similar to transactions with the US Dollar.
- PayPal USD is only available on PayPal. You cannot find this stablecoin on any other broker.
- PayPal USD lives on the Ethereum blockchain and uses POS (Proof-of-Stake)
What is a Stablecoin?
This article from cnbc.com helps us understand some details about stablecoins.
- A stable coin is a cryptocurrency that is backed by a fiat currency. In this case, PayPal is 100% backed by the US Dollar.
- Issuing a stablecoin may be more in line with PayPal’s core business model than people initially think, says Omid Malekan, an adjunct professor at Columbia Business School. One way to look at all of this is that PayPal believes, in the future, public blockchains will play a big role in its traditional business of payments. It’s just trying to evolve and keep up with cutting-edge technology.
- From a financial standpoint, using stablecoins isn’t much different than using a gift card, Malekan says. You can use your dollars to purchase stablecoins and then use those stablecoins to buy different cryptocurrencies or make other online purchases.
This video from cnbc.com states that PayPal is facing some difficult headwinds including:
- Increased competition from Apple Pay, Google Pay, and Amazon Pay.
- Large banks like JP Morgan and Bank of America have added competitive products.
The same video from cnbc.com does provide positive expectations with PayPal over the long-term. In summary, this is a long-term buy and hold.
➡️ Goal: All of our homework on this company leads up to the 4M checklist. A lot of investors only look at the numbers. Yes, it’s important to look at the first M (MOS) which is the math part of investing but it’s also important to look past the numbers and also look at the business, the competition, and the management. If all 4Ms pass, we should have high confidence in buying this stock.
❌ MOS: The financials are not great. The score of 44/100 and MOS of 0% give us the impression this stock is taking a nose dive. Although the financials are not what we want to see, this doesn’t mean we should give up.
✅ Meaning: The meaning is the strongest M and the reason why I like this stock. Transaction fee business models are highly scalable and PayPal has multiple businesses that leverage this revenue model. On the consumer side you have PayPal, Venmo, Xoom, Paidy, and Honey. On the business side you have PayPal, Braintree, Happy Returns, Hyperwallet, Chargehound, Simility, and Zettle. The specific features I like most, that drive significant user growth include BNPL and crypto.
✅ Moat: Payment tech is a fast-growing industry but PayPal still has one of the largest footprints on the planet. Adyen and Block are still far behind and the private company, Stripe, is only in 46 countries. Although Visa, Mastercard, and American Express are listed as competitors, they are also strategic partners because PayPal accepts payments with Visa, Mastercard, and American Express. Although payment tech is becoming more saturated, as the world population continues to grow, all competitors can thrive.
✅ Management: I’m very excited to see what Alex Chriss can do for PayPal. His experience with small businesses, SaaS, and customer retention should make an impact on PayPal.
8. Is PayPal stock a good buy?
I’m a long-term holder of PayPal but there are a few key triggers I want to see happen before I buy more shares. Those triggers include:
- EPS rise above $1.25.
- Quarterly revenue rise above $7.75B.
- Free Cash rise about $1B.
- A roadmap from Alex Chriss.
If we see those 4 boxes checked, the Score may jump above 50 and the MOS may jump above 0%. At that point, large institutions may start piling into this stock and we could see the share price take off with a vengeance!
Let’s see if Alex Chriss, Venmo, and PayPal USD stablecoin can turn this ship around.
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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.
If you found this stock review interesting, you may also like this review on Paycom.