Paypal (PYPL), a leading fintech payment company, reported soft Q3 earnings, and the stock is down almost 35% from its all-time high. A lot of investors start to question the company’s future prospects but we believe the company’s long-term prospect remains very formidable.
There is a lot of discussion about the moat of Paypal and its market share is its biggest moat. Paypal currently owns around 50% of the software payment processing market with Stripe being second at around 15%. People often compare Square (SQ) to Paypal but their core business focuses on different areas. Square focuses a lot on its POS (point of sale) system for SMB and the integration with Cash App. Whereas Paypal is a check-out option and an online payment solution that allows businesses and customers to buy and sell online. The area where Square and Paypal competes is mostly on the C2C segment which is Cash App vs Venmo. Besides, Square is currently only available mainly in North America and Europe whereas Paypal is available almost worldwide. To sum it up there are no other fintech companies that can threaten Paypal’s position at the moment as none of them are able to offer such a full suite of solutions.
The company is also actively seeking to expand its offering, especially on the consumer side as it is trying to build a financial super app. The company introduced its own buy now pay later feature to ride with the latest trend and its TPV (total payment volume) has already exceeded $8 billion annually. Expanded its cryptocurrency product offerings, launching the ability to buy, hold, and sell cryptocurrency rolled out Cash Back to Crypto, a new way for Venmo Credit Card customers to automatically purchase cryptocurrency from their Venmo account using cashback earned from their card purchases. It is also launching a high yield savings account and is planning to offer a trading platform in the future too. The company also acquired Japan’s leading buy now pay later company Paidy for $2.7 billion which massively increases its Asia’s presence by adding 3 million users with a GMV (gross merchandising volume) of $1.5 billion.
Diving deeper into the company’s Q3 quarter, it isn’t actually as bad as most thought it is. Revenue increased by 13% which is soft but if excluding the eBay Marketplaces segment, which they’re almost done getting rid of, revenue actually increased 25%. Payment volume growth is still strong at 24% and Venmo TPV increased 36%. The company also announced that Venmo users in the U.S. will be able to pay with Venmo on Amazon starting in 2022, which is likely to boost its TPV even further. The company ended the quarter with $7.8 billion cash which leaves room for stocks buyback or M&A activities. The quarter is not stellar but the stock does not deserve to be beaten down so much.
The company is currently trading at an estimated fwd 22 PE of 36 and an fwd 24 PE of 23%, it is actually cheaper than software companies like Microsoft (MSFT) which is trading at an estimated fwd 24 PE of 28. Paypal is also forecasted to grow faster at a CAGR of around 20% while Microsoft is forecasted to grow in the mid-teens percentage. Of course, we can’t simply compare their fwd PE and decide which company is cheaper as Microsoft is producing a much larger cash flow but just to put it in context Paypal is actually really fairly valued at current price levels. Due to Paypal’s transaction-based fee model, it is also relatively immune to inflation as prices in goods increasing might actually benefit Paypal. We believe the company’s prospect is intact and it will continue its growth due to its market leader position and its growing portfolio of offerings and its current valuation is well justified.
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