Venmo Monetization And AI Investments Will Improve Future Customer Experiences

Key Takeaways

• Innovations in branded checkout and Venmo monetization are driving increased user engagement, transaction volume, and revenue growth.
  
• Strategic expansions and investments in AI and automation aim to enhance operational efficiency, value-added services, and overall margins.
  
• Revenue and profit growth are at risk from renegotiation pressures, economic uncertainties, and reliance on incomplete innovation adoption amid interest rate challenges.

Catalysts

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

• PayPal's branded checkout innovations, such as reducing latency and increasing conversion rates, are expected to drive increased adoption and transaction volume, thus positively impacting revenue and transaction margins.
  
• The continued focus on Venmo monetization, with significant growth in debit card and Pay with Venmo monthly active accounts, will enhance average revenue per account and expand total payment volume, thereby supporting revenue and transaction margin growth.
  
• PayPal's expansion into omnichannel capabilities with PayPal Everywhere and international market expansions, including launching NFC in Germany, aims to drive higher user engagement and increase debit card usage, which could lead to improved revenue per account and overall revenue growth.
  
• Strategic partnerships with leading brands, aimed at expanding services like Fastlane and BNPL, present opportunities to increase transaction margins by enhancing value-added services and broadening merchant reach.
  
• Investments in AI and automation to improve operational efficiency and customer experiences are expected to reduce costs and lead to improved net margins, supplementing earnings growth.

PayPal Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PayPal Holdings's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 14.5% in 3 years time.
• Analysts expect earnings to reach $5.5 billion (and earnings per share of $6.28) by about March 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 analysts price target, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, up from 16.8x today. This future PE is greater than the current PE for the US Diversified Financial industry at 16.2x.
• 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 7.3%, as per the Simply Wall St company report.

PayPal Holdings Future Earnings Per Share Growth

Risks

• The forecasted 5-point revenue growth headwind from Braintree renegotiations indicates significant pressure on short-term revenue growth, which could impact long-term revenue projections.
  
• The expectation of a headwind from transaction loss improvements suggests potential increases in operating costs, which could negatively affect net margins.
  
• Global economic uncertainties, particularly the potential softness in Europe, may impact international revenue performance, possibly hindering overall revenue growth.
  
• A significant portion of projected benefits, such as increases in transaction margin dollars, relies on future adoption of newer product innovations like Fastlane and PayPal Everywhere, which have not yet reached full market penetration, posing a risk to revenue and profit growth.
  
• The anticipated negative impact of interest rate headwinds on transaction margin dollars could constrain earnings growth, especially if interest rates continue to influence customer behavior or credit performance.

Valuation

• The analysts have a consensus price target of $95.147 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 2028, revenues will be $37.8 billion, earnings will come to $5.5 billion, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $70.48, the analyst price target of $95.15 is 25.9% 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.