Paypal stock is currently down 74% from its 2021 highs.
This is the largest decline in paypal's short history as a public company by
far. So is this a busted company or is this just a busted stock? Here's why i think it's the latter
and I'm happy to buy shares today my name is Brian Feroldi and my name is Brian Stoffel
thanks to commonstock for sponsoring today's video as of the time of this recording i own
shares of paypal and brian stoffel does not so brian today paypal is a $94 billion dollar
company which is a little amazing because it used to be worth nearly $400 billion paypal's
mission statement is very wordy but at its core the company is focused on democratizing
financial services to ensure that everyone can take control of their financial life there's a lot
that paypal does but at its core it's a payments company it owns several brands including paypal
zoom venmo braintree hyperwallet honey and more paypal primarily makes money off of a percentage
of transactions so it's usage based but it can also make extra money in terms of foreign exchange
cross-border transfers and value-added services growth in some of the company's key metrics has
been lumpy given the pandemic however if you look at transactions this has grown at a 25%
annualized rate over the last seven years which is very strong just as encouraging total payment
volume which measures the amount of money changing hands through paypal's ecosystem
has grown even faster at 28% per year topping at over $1 trillion last year paypal has gotten to
the size and scale where demand for its products and services will ebb and flow with the economy
however we think that it continues to take share in the payment space and grow even if the economy
is weak now turning to the moat we're going to recognize how powerful the size of that network is
through the network effect paypal is by far the most commonly accepted digital wallet payment
form in north america and because of that it engenders strong network effects where more
merchants that accept mean more users who want to use it which leads to more merchants accepting it
as a form of payment we also think that paypal benefits from high switching costs once you get
set up and using paypal it becomes a little bit of a hassle to switch away to something else
beyond that we definitely give this company credit for its brand value people know about paypal and
overall we think that the moats surrounding this business is stable now if we look at the overall
numbers revenue growth has been solid over the past couple of years gross margins are decent
net income and free cash flow have both been plentiful if not growing very fast the balance
sheet is strong with over $15 billion in cash and only $8 billion in debt and returns on capital
are relatively high paypal is no longer run by its founders instead CEO dan Schullman has been
in the corner office for more than seven years he gets great reviews from employees overall however
inside ownership here is very low looking at the company's opportunity we believe
that paypal has a ton of optionality each one of those things you see listed there is a new product
that it's rolled out over the past 10+ years now one knock against the company is that it's already
largely optimized for free cash flow and profit so there's not a ton of operating leverage ahead
however the addressable market is enormous for digital payments total payment volume worldwide
is expected to be about $185 trillion dollars of which paypal is captured less than one percent
and while it goes after that opportunity it does have a history of funding it through acquisition
despite the fact that paypal stock is down huge this company has still outperformed the market
since being spun out of ebay more than seven years ago its track record of exceeding expectations on
the bottom line has been mixed in recent years and while the company does produce huge amounts of net
income and free cash flow it uses that to reward shareholders primarily through acquisitions and
buybacks the biggest risk for investors to keep in mind are competition disruption particularly
from cryptocurrencies outside forces especially interest rates in the macro environment and the
valuation which is still a little high but more compelling than it's ever been before we'll cover
the valuation in just a little bit but here's how the company performed in the most recent quarter
revenue was up 8% to $6.48 billion dollars that exceeded wall street's estimate and exceeded
management's guidance the bottom line wasn't as pretty with earnings per share falling 28%
but that is largely in line with what management and wall street was expecting if we dig a little
deeper we see that gross margins operating margins and net margins were all still relatively healthy
it's worth noting that free cash flow and net income did fall however that was expected as
management is hitting the gas on investments and business has slowed somewhat the balance sheet is
still in excellent condition with $15 billion in cash and $8 billion in debt one reason why shares
have been under so much selling pressure recently is that the company's growth rate has slowed
dramatically in the most recent quarter total payment volume actually declined sequentially to
just $323 billion dollars and the growth rate has slowed dramatically when compared to 2020 in 2021.
the number of new accounts being added has also slowed dramatically but is still positive but one
trend we're keeping our eye on is the number of transactions per account which reached an
all-time high of 47 during the most recent quarter demand for the company's product and
services absolutely exploded in 2020 and 2021 which artificially boosted the company's margins
more recently we've seen the reverse of that as paypal has continued to invest in its business
and the top blank growth has slowed which has put downward pressure on its margins and profits now
management has said a lot about how it's pivoting its approach right now but why well they pointed
out a couple of things one are inflationary pressures combined with supply chain issues that
cause the u.s economy to actually contract during the first quarter of 2022. management noted that
they have a lot of headwinds going against them right now one of which is a return to in-store
shopping experiences which is a headwind for companies like paypal they also noted that as the
economy has contracted and inflation has expanded people are spending more on non-discretionary
items like groceries and gas things which they don't usually use paypal to pay for so what's
management going to do about it they're really going to hone in on growing two businesses in
which they excel the first is checkout the second is digital wallets these are both areas where
paypal is a market leader and can continue to expand its leadership position at the same time
they're going to be cutting back expenses in other areas like international expansion while
they're going to leave in place their ability for merchants to use cross-border commerce
paypal won't be investing as much in that business as it's too expensive to acquire customers and
they don't get enough payback so taking all that together what is management expecting
for the upcoming quarter they guided for nine percent growth in revenue to $6.8 billion dollars
that's about what wall street was expecting management expects that margins will continue
to be under pressure and they're calling for a 25% decline in earnings per share at about $0.86 cents
that was below what wall street was expecting and if we turn to full-year guidance we see much the
same story management is guiding for about $28.5 billion dollars in revenue that'd be growth of 12%
which matches wall street's expectations they also see the company earning about $3.85 per
share that's a little bit below what wall street is expecting and represents about 15% decline from
the same time last year so what does this all mean for the company's current valuation well
if you look at paypal's current price to sales ratio it's currently trading under four times
which is the lowest valuation on record the same is true if we look at the price to earnings ratio
which is useful because paypal is optimized for profits it's trading at about 27 times trailing
earnings which is the lowest mark since it came public it's a similar story for the price to free
cash flow ratio paypal is currently trading under 20 times free cash flow which shows just how much
pessimism there is in this business today so what are we going to watch moving forward well
first and foremost is total payment volume the more money that flows through paypal's ecosystem
the wider the moat is the second is total user growth while it's understandable why user growth
has slowed so significantly in the most recent quarter we want to see signs in the long term
that paypal continues to attract new users to its platform at the same time we want to know that
existing users are using more products so we're going to keep an eye on all those new products
that paypal is rolling out and fourth we're going to keep an eye on the company's free cash flow
management noted that their investment mode right now so we expect free cash flow to ebb and flow
over the long term we want to see free cash flow production continue to rise over time taking all
these things together we think that paypal is in a moment of transition but its moat is very
stable and while there are potential for yellow flags we can't help but think that the overall
thesis for owning paypal stock is still largely on track even though the company's growth rate
has slowed considerably due to the pandemic so how does this company score on our investing checklist
i knocked a couple of points off recently but this is still very much in my investable category
and paypal lands right in the same range and my anti-fragile framework it lost some points because
its founders are no longer involved and management doesn't have a lot of skin in the game so there
you have it overall we think that paypal is still a strong business and it's much stronger than its
recent stock price movement would indicate to take advantage of that we'll be adding paypal to
our real money portfolio so this is our fourth real money purchase if you want to follow the
portfolio in real time you can do so by following us on common stock we'll also be posting all the
slides that you've seen today to our common stock profiles common stock has agreed to give
$250 in cash to whoever makes the most insightful comment on our slides and we mean it when we say
we're looking for the most insightful comments they can be for or against or adding any color to
our buy decision we're looking for a value add so there you have it we're going to be adding paypal
to our real morning portfolio soon we know that investing sucks right now and it's really hard
time out there for investors but we're going to remain focused on what we can control which is
finding good companies buying them at compelling times and holding for the long term brian's out