Transition To Commerce Will Expand Smart Wallet And Venmo Services

Key Takeaways

• PayPal's transformation into a commerce platform and smart wallet introduction could enhance revenue and improve merchant relationships.
  
• Expanded branded experiences, BNPL rollout, and value-added services are driving transaction volume, margin, and earnings growth.
  
• Macroeconomic uncertainty, competition, and regulatory changes could hinder PayPal's revenue growth and cross-border transactions amidst challenges in key markets.

Catalysts

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

• PayPal is transforming from a payments company to a commerce platform, focusing on personalized experiences and leveraging vast data. This strategic shift could drive future revenue growth as it taps into broader commerce opportunities beyond traditional payment processing.
  
• The introduction of a dynamic smart wallet, enabling consumers to make optimal payment choices, supports PayPal's transition to an end-to-end commerce partner, potentially impacting net margins positively as it deepens relationships with merchants and boosts transaction volumes.
  
• PayPal's branded experiences and omnichannel initiatives, which include expanding Venmo and PayPal debit card usage, are accelerating TPV growth; these developments are likely to enhance revenue and improve earnings due to increased consumer engagement and frequency of use.
  
• The rollout of Buy Now, Pay Later (BNPL) and intensified marketing efforts in Europe and key markets may bolster transaction volume and revenue, especially as BNPL users tend to spend more, contributing to mid
• and long-term revenue growth and margin improvement.
  
• PayPal's focus on value-added services such as optimized debit routing and fraud protection are generating higher transaction margins, which is expected to continue bolstering earnings growth by shifting volume to more profitable avenues while improving service offerings to large and small merchants.

PayPal Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PayPal Holdings's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.3% today to 14.4% in 3 years time.
• Analysts expect earnings to reach $5.4 billion (and earnings per share of $6.16) by about April 2028, up from $4.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $4.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, up from 14.3x today. This future PE is greater than the current PE for the US Diversified Financial industry at 14.2x.
• Analysts expect the number of shares outstanding to decline by 6.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.19%, as per the Simply Wall St company report.

PayPal Holdings Future Earnings Per Share Growth

Risks

• The macroeconomic uncertainty, tariffs, and geopolitical issues could impact consumer spending, supply chains, and PayPal's revenue growth.
  
• The shift away from unprofitable Braintree volume, while positive for transaction margins, may dampen gross revenue growth.
  
• Regulatory changes, such as tariff exemptions with China, could impact cross-border transaction volumes and negatively affect branded checkout TPV.
  
• Competition in key markets like the UK may challenge PayPal's ability to gain market share and maintain revenue growth.
  
• Changes in foreign currency exchange rates could have an unpredictable effect on PayPal's cross-border transaction revenues.

Valuation

• The analysts have a consensus price target of $83.465 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 $49.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $37.8 billion, earnings will come to $5.4 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $66.32, the analyst price target of $83.47 is 20.5% 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.