Central Bank Digital Currencies Will Jeopardize Payment Revenues

Key Takeaways

• Rising competition from fintech, big tech, and alternative payment technologies is threatening PayPal's core business and long-term revenue growth.
  
• Regulatory pressures and the shift toward integrated super-apps and digital currencies are increasing costs and eroding user acquisition and retention.
  
• Diversifying digital products, expanding international partnerships, and enhancing operational efficiency position PayPal for sustained revenue and margin growth amid global digital wallet adoption.

Catalysts

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

• The increasing global adoption of government-backed digital currencies is likely to reduce reliance on third-party digital payment platforms like PayPal. As central banks promote their own digital currencies, a significant portion of cross-border and domestic transactions may eventually bypass PayPal entirely, threatening long-term transaction volumes and revenue growth.
  
• Intensifying regulatory scrutiny, including stricter requirements for anti-money laundering, cross-border payments, and data privacy, will force PayPal to devote substantial resources to compliance. This will directly increase operating expenses and could restrict the company's ability to expand into new markets or products, causing future net margin compression.
  
• Younger consumers are gravitating towards integrated super-app ecosystems in emerging markets, diminishing the relevance of standalone digital wallets such as PayPal and Venmo. This demographic shift is expected to erode user acquisition and retention, resulting in stagnant or declining revenues in key international growth markets over time.
  
• As industry competition accelerates with fintech startups and big tech firms offering low
• or zero-fee payment solutions, PayPal will be pushed to lower its transaction fees to remain competitive. This price competition, combined with the ongoing commoditization of digital wallets, is likely to further pressure net margins and reduce earnings growth in the coming years.
  
• The rise of direct account-to-account payments and blockchain technologies is enabling merchants and consumers to bypass traditional payment processors altogether. As adoption of these alternative rails increases, PayPal's core business faces disintermediation risks that could significantly shrink its share of transaction revenues, undermining its long-term earnings potential.

PayPal Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on PayPal Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming PayPal Holdings's revenue will grow by 4.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 14.5% today to 13.6% in 3 years time.
• The bearish analysts expect earnings to reach $5.0 billion (and earnings per share of $5.67) by about July 2028, up from $4.7 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 bearish analyst cohort, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, down from 14.2x today. This future PE is lower than the current PE for the US Diversified Financial industry at 17.9x.
• Analysts expect the number of shares outstanding to decline by 6.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

PayPal Holdings Future Earnings Per Share Growth

Risks

• Continued acceleration of global digital wallet adoption and e-commerce expansion, as evidenced by PayPal's branded experiences and PayPal World initiatives, is likely to increase transaction volumes and boost revenues over the long term.
  
• Strong innovation momentum in areas such as Buy Now, Pay Later, agentic AI-powered commerce, ads, stablecoin products, and omnichannel capabilities provides multiple avenues to diversify and grow PayPal's revenue streams and enhance margins in future years.
  
• Rapid growth and reinvention of Venmo from a peer-to-peer app into an everyday commerce platform, with increasing partnerships, card adoption, and offline utility, is driving significant engagement and user growth, which can substantially lift average revenue per user and overall top-line revenue.
  
• Expanding international presence and partnerships with major digital wallets (UPI, Tenpay Global, Mercado Pago) through PayPal World create opportunities for PayPal to capture incremental payment flows and market share globally, supporting future earnings growth.
  
• Ongoing operational efficiency improvements, investment in AI-driven risk controls, and platform modernization initiatives are driving better cost control and higher operating leverage, which should help sustain and improve net margins and profitability in the long run.

Valuation

• The assumed bearish price target for PayPal Holdings is $62.0, which represents the lowest price target estimate amongst analysts. 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $62.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $36.7 billion, earnings will come to $5.0 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $69.71, the bearish analyst price target of $62.0 is 12.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.