Fastlane Adoption And Venmo Monetization Will Expand Market Reach

Key Takeaways

• Innovation and partnerships, such as PayPal Everywhere and major brand collaborations, are set to drive customer adoption and transaction volume growth.
  
• Monetizing Venmo and expanding into Europe with NFC capabilities could boost revenue, while AI investments aim to cut costs and enhance margins.
  
• Strategic pricing adjustments, interest rate shifts, and international uncertainties could challenge PayPal's revenue growth and profitability in 2025.

Catalysts

Operates a technology platform that enables digital payments for merchants and consumers worldwide.

• PayPal's focus on innovation with products like PayPal Everywhere and Fastlane is expected to drive higher customer adoption and conversion rates, significantly boosting revenue growth.
  
• The partnership strategy with major brands and increasing the number of merchants using Fastlane could expand PayPal's commerce ecosystem, positively impacting transaction volumes and net margins.
  
• Enhancing the monetization of Venmo through increased debit card and Pay with Venmo adoption is projected to grow Venmo's revenue contribution, leading to overall revenue and earnings improvement.
  
• Scaling PayPal Everywhere in European markets and introducing NFC capabilities are anticipated to broaden PayPal's geographical reach, amplifying transaction volumes and revenue streams.
  
• Strategic investments in AI and automation aim to enhance operational efficiency and effectiveness, which could reduce costs and improve net margins, supporting long-term earnings growth.

PayPal Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on PayPal Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming PayPal Holdings's revenue will grow by 7.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 13.0% today to 14.6% in 3 years time.
• The bullish analysts expect earnings to reach $5.8 billion (and earnings per share of $6.72) by about April 2028, up from $4.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, up from 14.8x today. This future PE is greater than the current PE for the US Diversified Financial industry at 14.5x.
• Analysts expect the number of shares outstanding to decline by 5.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

PayPal Holdings Future Earnings Per Share Growth

Risks

• The renegotiation of large Braintree merchant agreements is expected to result in a headwind to revenue growth of about 5 points in 2025, indicating potential pressure on future revenue growth due to strategic pricing adjustments.
  
• Transaction margin dollars face a 1-point headwind in 2025 due to interest rate cuts, which could exert pressure on earnings given that 2024 had a 2-point benefit from interest on customer balances.
  
• Transaction loss improvements benefited the company in 2024 by 1 point, but normalization in transaction loss during 2025 could impose a 0.5-point headwind, affecting earnings capacity as new products are rolled out.
  
• Uncertainties in European markets could contribute to challenges in maintaining branded checkout growth, potentially impacting revenues as international markets pose additional risks.
  
• The expectation of uneven quarterly nontransaction operating expenses and the increase in the effective tax rate by over 2 points present risks to net margins, affecting profitability throughout 2025.

Valuation

• The assumed bullish price target for PayPal Holdings is $101.57, which represents one standard deviation above the consensus price target of $88.14. This valuation is based on what can be assumed as the expectations of PayPal Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $125.0, and the most bearish reporting a price target of just $64.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $39.8 billion, earnings will come to $5.8 billion, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $62.0, the bullish analyst price target of $101.57 is 39.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.