Paypal is a powerhouse in the digital payment industry
with a market valuation of over $84 billion.
The company's annual revenue has seen impressive
gains, reaching $27.5 billion in 2022.
Paypal was one of the preeminent leaders in
digital payments starting ten plus years ago when they
were, you know, a part of eBay and was the number one
place where you would feel comfortable in putting your
personal information online to be able to transact a
payment in the e-commerce world.
But the company's performance in the stock
market paints a different picture.
After reaching new heights during the pandemic, shares
of the company saw significant losses.
In January. Paypal also announced it will lay off
2,000 employees, accounting for about 7% of its
workforce.
Paypal was really profitable during the pandemic and grew
so quickly because ultimately people were going
digital, right?
I think it's quite obvious that their growth has
slowed. I think the question is really, you
know, what's driving that? We like to compare PayPal,
unfortunately, to an IBM of the world.
We wonder like, is this the new Big blue?
Thinking about a company that was at the top of its
industry that ultimately saw its organic growth
prospects start to decline?
So what is happening with PayPal and will its stock
recover?
After going public in 2002 at just $13 per share,
PayPal was acquired the same year by eBay for $1.5
billion.
EBay obviously needed some type of payment solution,
and PayPal was was the perfect fit for them at the
time.
EBay stepped in, as, you know, their biggest and
largest, most important partner.
And together they were able to help foster that checkout
experience that so many consumers were feeling
comfortable with transacting.
At one point, approximately 60% of PayPal's revenue came
from payments made on eBay.
PayPal's foundation with eBay, I mean, it really just
gave them a base to build off of, I think in the early
days. And I think that's very important for payment
processors. Payment processors of any type, you
know, they need scale. It's a scalable business.
However, that relationship came to an end in 2014 when
PayPal split up from eBay to become a separately
traded company.
PayPal was getting to a level of scale where now
it's branching off into different areas of digital
payments, be it wanting to get into more merchants that
are outside of eBay and more of the P2P and consumer
side of the world. If you think about the Venmo and
Braintree acquisition in the mid-2010s, that type of
a business is something that wasn't necessarily
strategically moving the same direction as what a
traditional online e-commerce retailer would
do.
After the split, PayPal revenue continued to soar,
eventually surpassing eBay in annual revenue.
EBay was a strong player, I think, early in the
evolution of e-commerce, but as time went on, you saw
more and more marketplaces and the growth shifted
elsewhere. And I think PayPal being an independent
player, I mean, that's one of the things that I think
was crucial for them in terms of the spin off was
being able to be an independent player and serve
all of those other players that are out there.
And that was, I think, very crucial to PayPal's ongoing
growth.
Today, PayPal makes about 90% of its profits from
transaction revenues or fees they charge to
merchants and consumers on each transaction.
This makes total payment volume an essential metric
for the company's success.
So total payment volume or TPV, is one of the key
metrics to understand the growth of PayPal's business
on a long term trajectory because it's a payments
company. And it's what TPV really is, is the
culmination of the various products that they have and
the spending that goes over their platform that they
charge their take rate on.
While it's not necessarily the 1-to-1 read through to
what revenue growth could be or what future earnings
could be, it is an important leading indicator
to see how important PayPal is to the e-commerce
environment as a whole.
This is why PayPal thrived during the pandemic as
consumers were forced to depend more on online
transactions. Annual revenue shot up from $17.8
billion in 2019 to more than $25 billion in 2021.
And shares of the company saw new heights during the
same period.
I think it's pretty easy to see how when we were all
locked at home that digital payments were going to be a
much more important part of our financial lives.
Not being able to go out into a restaurant or to go
to your favorite local retail store also lent
itself to more online shopping where PayPal was
clearly one of the best positions and in turn led to
outsized growth from a volume perspective over
those, you know, year and a half.
But as pandemic restrictions began to ease, PayPal stock
began to show a crack, losing all of its gain over
the pandemic just within a year after a series of
disappointing earnings reports.
PayPal was obviously a beneficiary during the
pandemic and post-pandemic a lot of investors sold the
winners.
I think, you know, to me it implies that the market is
very focused on kind of near-term, absolute growth.
A lot of investors and, you know, PayPal themselves
thought that the e-commerce growth was going to continue
to grow at really significant levels.
At the height of the pandemic, e-commerce retail
sales accounted for 16.4% of total sales in America.
Since then, the growth has largely slowed down,
remaining under 15% over the past two years.
The forecast of e-commerce growth over the next 3 to 5
years is anywhere from 10% to 15%.
However, pre-pandemic, you were operating in an
environment where e-commerce was growing
anywhere from 20% to 25%.
As the lockdowns subsided, you know, people went back
to in-person spending.
Some people, believe it or not, even went back to cash.
The discretionary funds that you and I have on a day to
day basis start going to additional services and are
under more pressure with the the impact of inflation.
So when assessing what you're going to be spending
your monthly paycheck on, a lot of e-commerce is
discretionary. Things like additional clothes or
experiences online and other digital goods and
services that you may not necessarily want to be
allocating that much of your budget to.
And while PayPal's total payment volume has seen
continuous gains, its growth has largely slowed
down. Today, some of the biggest tech companies have
an online payment platform of their own, and even big
banks are joining in on the action.
The thing about PayPal, there's a a positive and a
negative to the fact that they're so focused on
e-commerce. The positive, obviously, is that that's a
high growth area and that benefits them over time.
The negative is, is that that's where a lot of the
fintech innovation is centered and a lot of the
investment is going after that space.
Before the pandemic, there weren't really many other
buttons that you would see on your general Macy's
checkout page.
Not traditionally viewed as payment companies started to
come to the surface with additional buttons.
So Shopify's Shop Pay button and Amazon's Checkout
With Amazon pay are starting to become real
drivers for those businesses and not to
mention the biggest threat of all, Apple Pay, which
last holiday shopping season showed better growth
than really any other payment method that was
available to holiday shoppers.
Despite the split, PayPal and eBay had a five year
operating agreement that allowed PayPal to remain as
its primary payment partner.
That agreement came to an end in 2020, contributing to
PayPal's slower growth.
Termination of the eBay business certainly was a
drag on reported growth.
You know, that was real revenue that they lost.
I don't think it's any coincidence that at the same
time that the eBay agreement started taking
effect and leading to a headwind in the business,
you started to see a broader deceleration in
PayPal's growth.
Despite its struggle, PayPal's role in the fintech
industry is far from over.
Paypal obviously is a business that faces some
issues in the near term, I don't think anybody
questions that.
But from our point of view, the long term picture still
looks pretty bright.
I don't necessarily think it's the end for PayPal.
It may be the end for PayPal being viewed as the
preeminent leader in digital wallets and digital
payments. However, I think that PayPal is really well
positioned to grow in line with e-commerce in the
foreseeable future.
For now, PayPal's focus has been on long term growth.
I think the near term opportunity, there's not
much that they can do about kind of market conditions
and the growth there. They just kind of have to weather
it.
Now, we still think that overall the stock is not a
safety play.
If the market should go down with an economic
downturn, we think PayPal is going to go there too.
But we do think that they're setting up the
company for a really long term strategic initiatives
that should benefit both revenue growth and adjusted
EBITDA margin expansion.
Paypal declined to participate in this
documentary.
During its 2022 second quarter earnings report,
PayPal CEO Dan Schulman commented that while there
are a number of unknowns regarding the macro
environment, we can largely control our spend and its
implications on earnings growth.
Experts suggest that PayPal's next move should be
focusing on what it is they do best.
I think Venmo is still an asset that has a lot of the
makings of the future of digital wallets and consumer
banking. And a lot of the Gen Zs and Millennials of
the world are increasingly using digital wallets like
Venmo and Cash App as their primary bank account.
Dan Schulman, who became the CEO of PayPal in 2015,
announced his intention to retire from the company at
the end of 2023.
Determining who will lead the company next will play a
crucial role.
On whether PayPal can return to its former
dominance.
I think that overall there is still uncertainty about
who's going to run the company and which direction
this new CEO will have for the company.
And while Dan had several years of really quality
growth and share appreciation, I think some
of the pitfalls that that emerged post-pandemic really
kind of, you know, signed his end for PayPal.
It's important for PayPal to secure new leadership as
soon as possible. Particularly as a lot of its
competitors continue to step up their investment
dollars back into their businesses.