Announcement on 05 January, 2025

Honey Lawsuit Could Cause Significant Damage To The Brand

PayPal acquired Honey Science Corp. for $4 billion in 2020. The company, which became a subsidiary of PayPal, is a browser extension business that applies coupon codes on e-commerce websites.
PayPal partnered with over 30,000 businesses that would feature the extension for every customer who had it, while the business also relied on promotion by high-profile influencers, particularly on YouTube.
However, a YouTube channel, MegaLag, exposed the business as a major influencer scam, accusing their business model of ”advertising fraud, affiliate fraud, the illegal collection of personal data, deception, lies, coercion, extortion.”
As exposure happened just a week ago, the consequences of the exposure are still uncertain, but first lawsuits have already been filed. The situation certainly mandates further attention, which could cause significant goodwill impairment on PayPal’s balance sheet.

Institutional Interest and Trump Effect Prompts Rating Revisit

Bank of America recently upgraded PayPal, giving it a Buy rating. The bank cited progress on payment turnaround, improved execution, encouraging holiday e-commerce trends and acceleration in transaction growth in 2025.
However, Trump's second term remains a question mark, as trade protectionism and tariffs could impact sales of imported products. Furthermore, Trump's stance against labor automation and job preservation goes against the e-commerce trends that seek to cut costs and boost margins.
Despite multiple former PayPal executives now a part of Trump's administration, it is unclear whether those connections would directly benefit the company.

I remain positive on PayPal's turnaround, but owing to two negatives looming over the company's short term, I'm changing my valuation to reflect the slower-than-anticipated growth, reducing it to 2% p.a., down from the originally anticipated 2.30%.

Key Takeaways

PayPal is the online payments household brand benefiting from the positive trend in the E-commerce industry.
Venmo’s sub-brand is a growth driver, which could reach over $2 billion in annual revenue by 2027. Meanwhile, an expansion into point-of-sale solutions could be yet another winner.
A $15 billion repurchase program signals management’s confidence in PayPal’s valuation, delivering value to shareholders.
Intense competition from Apple Pay, Google Pay, and DeFi poses risks, which I believe the management can handle. Furthermore, the Honey lawsuit should not damage the brand but could deliver a short-term setback.
The firm could achieve healthy growth, rising from the current EPS of around $4, to around $5.6 by the end of the decade.

Industry Catalysts

E-commerce Growth and Digital Payment Adoption

E-commerce is expected to reach $6.8 trillion by 2028, creating a tailwind for digital payment providers. The rise of direct-to-consumer (DTC) brands and subscription-based e-commerce models also increases demand for seamless payment solutions

Furthermore, the growth of social media with purchases going directly through platforms like Instagram, Facebook and TikTok is another venue where payment processors can grow their presence. With more merchants selling directly through social media, integrated payment options become essential part of that market.

Buy Now, Pay Later (BNPL) Segment Growth

The growing popularity of BNPL services presents an opportunity for payment providers. The BNPL market is set to grow from $37 billion in 2024 to $167 billion by 2032. This represents a notable 20% annualized growth rate, which is easy to integrate into the existing payment infrastructure for the most popular payment providers.

Regulatory Support for Digital Payments and Emerging Market Opportunity

Governments worldwide promote cashless transactions through financial inclusion policies and digital infrastructure improvements. Regulatory initiatives like open banking and real-time payment frameworks create opportunities for digital payment providers to expand service offerings and integrate deeper into the global financial ecosystem.

In recent years, the digital payment market has notably surged in emerging markets and developing economies, where the number of adults using these services rose from 35% in 2014 to almost 60% by 2021. With increasing smartphone penetration and growing internet accessibility, these markets offer lucrative opportunities for global digital payment brands that benefit from international recognition.

Company Catalysts

Venmo and Branded Checkout Growth

By 2027, the management projects Venmo alone to contribute over $2 billion in annual revenue. They anticipate that Pay with Venmo's total volume will grow by over 40% annually and debit card transactions will increase by 20%. Those are ambitious projections, but with a renewed focus on small and medium-sized businesses, they’re not out of reach. Currently, around 30% of U.S. businesses, by 2027, the branded checkout could achieve as much as 80% of global transactions through the platform.

Omnichannel Payment Expansion

PayPal is broadening its ecosystem to include in-store payments, debit and credit card offerings, and business lending. By positioning itself as a comprehensive financial services provider, PayPal deepens customer relationships and boosts retention. The company’s expansion into point-of-sale (POS) solutions allows it to compete directly with Square and other fintech players, capturing a larger share of offline transactions.

Fastlane and Checkout Optimization

PayPal’s Fastlane guest checkout feature significantly reduces friction in the payment process, increasing merchant conversion rates. By improving the user experience, PayPal strengthens its competitive edge in e-commerce transactions. The company continues to enhance checkout speed, leveraging tokenization and biometric authentication to improve security and ease of use.

Aggressive Share Repurchase Program

With a newly authorized $15 billion buyback program, PayPal is aggressively reducing its share count. This enhances earnings per share (EPS) growth and signals management’s confidence in the company’s undervaluation. By focusing on share repurchases, PayPal ensures long-term value creation for shareholders, particularly in a market where its stock remains undervalued relative to its historical multiples.

Risks To My Thesis

Intensifying Competition

Apple Pay, Google Pay, and Shopify are investing heavily in their payment ecosystems, challenging PayPal’s dominance. If PayPal fails to differentiate itself, it could face market share erosion. Additionally, the rise of decentralized finance (DeFi) solutions and blockchain-based payment alternatives could disrupt PayPal’s traditional transaction model.

Contract Renegotiation With Braintree

Renegotiating Braintree contracts with large merchants could result in a 5% revenue headwind in 2025 despite a 1% improvement in transaction margins, which may weigh on investor sentiment. Although a short-term risk, 5% is enough to hurt a short-term top line.

Honey Class Action Lawsuit

Honey is a free browser plugin extension launched in 2012, which PayPal acquired in 2020 for $4 billion. In December 2024, a YouTube user, MegaLa,g published a video accusing the company of hijacking affiliate links.

Per his explanation, Honey was replacing the affiliate tracking code and switching it to obtain commission instead of the original creators. A class-action lawsuit soon followed in California, which could cost the company significantly and damage its reputation.

Assumptions

I expect the company to take advantage of the current Trump administration's e-commerce growth and pro-business-less-regulation stance.
I expect the latest lawsuit to cause more media backlash than monetary damages, but in the end, it will not severely damage the brand as the incident occurred under a different brand name and from an acquired business.
I expect PayPal’s revenue growth to continue at 5% annually, which is slightly below the consensus analyst expectation. I attribute this stance to intensifying competition in the space.
I expect the management to continue buying back shares at a pace of 2% annually, bringing the share count under 1 billion by the end of the decade.

Valuation

PayPal's revenue grows at 5% annually, reaching $40.58 billion by 2029, up from $31.80 billion in 2024. Net profit margin remains at 13%, with earnings increasing from $4.13 billion in 2024 to $5.28 billion in 2029.

Declining shares outstanding by 2% annually results in 930 million by the end of 2029. EPS rises from $4.01 in 2024 to $5.68 in 2029, driven by earnings growth and share buybacks.

The present value of 5-year EPS projections totals $18.62, combined with the terminal value, yielding an intrinsic value of $110.77 per share.

How well do narratives help inform your perspective?

Disclaimer

Simply Wall St analyst StjepanK holds no position in NasdaqGS:PYPL. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimate's are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

PayPal’s Strong Branding Can Take Advantage Of E-Commerce Tailwind