Venmo's Shift To Broader Financial Solutions Will Increase Market Share In The Future

Key Takeaways

• PayPal's partnerships and strategic shifts aim to drive revenue growth through increased conversion rates and expanded commerce capabilities.
  
• Expanding PayPal Complete Payments and evolving Venmo suggest enhanced market share and positive earnings impact.
  
• A shift to profit over volume may slow revenue growth short-term, with risks from innovation reliance and potential margin impacts from interest changes and new strategies.

Catalysts

Operates a technology platform that enables digital payments on behalf of merchants and consumers worldwide.

• PayPal's transformation from a payments company to a commerce platform, highlighted by partnerships with major players like Fiserv, Adyen, Amazon, Global Payments, and Shopify, indicates a strategic shift that could enhance revenue growth in the future.
  
• The improvements in branded checkout experiences, particularly on mobile, aim to increase conversion rates significantly, which can boost transaction volumes and revenue.
  
• The introduction of Fastlane and PayPal Everywhere initiatives is designed to increase conversion rates, driving revenue growth as more merchants adopt these features.
  
• Expansion of PayPal Complete Payments into new geographies and increased integration with platforms like Shopify and Amazon could lead to higher revenues and market share in the SMB sector.
  
• Venmo's strategic shift from a P2P service to a broader financial solution, through initiatives like Venmo debit card and Pay with Venmo, is expected to increase monetization, impacting earnings positively.

PayPal Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PayPal Holdings's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.1% today to 13.6% in 3 years time.
• Analysts expect earnings to reach $5.2 billion (and earnings per share of $5.94) by about December 2027, up from $4.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $4.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.3x on those 2027 earnings, down from 20.0x today. This future PE is greater than the current PE for the US Diversified Financial industry at 17.8x.
• Analysts expect the number of shares outstanding to decline by 4.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

PayPal Holdings Future Earnings Per Share Growth

Risks

• The shift from focusing on high proportions of payment processing volume to more profitable margins could lead to reduced revenue growth in the short term, as reflected in the deliberate slowing of Braintree’s volume and revenue growth. This change prioritizes healthier margins but may impact top-line growth.
  
• Interest income, which contributed significantly to transaction margin dollar growth in previous quarters, is expected to become a minimal tailwind and potentially a headwind by 2025 due to anticipated interest rate cuts, thus negatively affecting net margins and earnings.
  
• The heavy reliance on new products and innovations like Fastlane, PayPal Everywhere, and branded checkout improvements introduces execution risk. If these innovations do not drive the expected consumer adoption and transaction volume growth, it might slow future revenue growth.
  
• The increasing focus on reinvesting cost efficiencies into growth initiatives, such as marketing and product rollouts, could lead to higher non-transaction operating expenses in the short term, potentially impacting net profit margins if revenue does not increase as anticipated.
  
• PayPal’s decision to renegotiate enterprise agreements and emphasize broader strategic deals, such as with Braintree and Venmo, could slow immediate transaction volume growth if partners do not adopt or integrate these changes quickly, thereby affecting short-term revenue projections.

Valuation

• The analysts have a consensus price target of $93.69 for PayPal Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $38.3 billion, earnings will come to $5.2 billion, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 7.0%.
• Given the current share price of $88.25, the analyst's price target of $93.69 is 5.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.