Why PayPal’s Growth Story Isn’t Over

As PayPal (PYPL) solidifies its position in the digital payments landscape, it presents a promising opportunity driven by transaction growth, profitability, and an attractive valuation. This analysis delves into how each of these areas contributes to PayPal’s robust potential as an investment.

Transaction growth is a cornerstone of PayPal’s continued strength, underpinned by the company’s broad array of services and expanding user base. Since Q1 2022, PayPal’s transaction volume has grown from 5,161 million to 6,631 million by Q3 2024. This increase, amounting to an additional 1,470 million transactions, reflects PayPal’s ability to attract and retain a dedicated customer base across its ecosystem. Stability in transaction frequency is bolstered by brand loyalty, as seen in minor fluctuations in the year-over-year (YoY) transaction growth rate, which has largely remained stable at around 10% after some initial variability.

Much of PayPal’s growth has been driven by the performance of its core products. PayPal’s branded checkout continues to perform strongly, with a YoY growth rate of 6%, supported by large enterprises, marketplaces, and international markets. Venmo, a key driver in the peer-to-peer payments space, has contributed an 8% increase in Total Payment Volume (TPV), further strengthening PayPal’s transaction base. Cross-border transactions have also grown by 7%, fueled by continued demand within Europe, where digital payment adoption is high.

Source: Threads

To further enhance its checkout process, PayPal has recently launched an improved mobile interface that streamlines the checkout experience for consumers, whether using one-time checkouts, recurring payments, or vaulted options. This update has already shown positive results, with a 20% transaction rate increase for one-time purchases through the new interface.

Increasingly, Venmo is expanding beyond peer-to-peer transactions- a further indication that PayPal is working to ensure more touchpoints and greater user engagement by adding more features such as merchant rewards, debit card cashback, and refreshed app experiences. Indeed, the portfolio of services that the PayPal ecosystem represents has become a diverse, rich platform for user engagement, lending to the long-term path to revenue stability.

This is also reflected in PayPal's resiliency in another area: profitability. Although margins have compressed somewhat over the last few quarters, the company has maintained healthy profit margins through cost rationalization. PayPal's transaction margin has averaged around 45-46% for the last two quarters, therefore, after an initial decline from 50.9% in Q1 '22 to 46.6% in Q3 '24. Though the road was somewhat rocky due to strategic cost control, PayPal's profitability was maintained, allowing its non-GAAP EPS in Q3 '24 to rise 22% YoY—a strong 146% improvement from Q1 '22.

PayPal’s strong profitability derives from effective cost control in sales and marketing. PayPal has strategically managed its marketing and sales expenses, with sales and marketing costs dropping by 22% YoY in Q2 2023 and 18% in Q3 2023. However, this expense rose by 17% in Q3 2024, indicating a targeted approach to reinvestment in high-impact areas while maintaining overall efficiency in cost management.

PayPal’s Profitability Push: Tech-Driven Margins Amid Fierce Fintech Competition

Enhanced technology has contributed to PayPal’s profitability by reducing transaction losses and boosting the transaction margin by 115 basis points in Q3 2024. This improvement underscores PayPal’s commitment to minimizing credit risks and fraud-related losses and maintaining its profit margins. Although YoY revenue growth has slowed somewhat, PayPal’s ability to balance operational expenses has enabled it to maintain stable margins. In Q3 2024, revenue grew by 6% YoY, while non-GAAP operating income rose by 18%, demonstrating that PayPal can still deliver profitability even with slower payment volume growth. 

Lastly, PayPal faces fierce competition due to the entry of tech giants like Apple, Google, and emerging fintechs offering integrated payment ecosystems, advanced financial products, and seamless user experiences that challenge PayPal’s market share in digital payments. According to the CPA, David Kindness, to remain competitive in the market, PayPal should leverage its vast merchant network, enhance personalization, and develop omnichannel solutions to strengthen its core. By pursuing strategic partnerships, investing in technologies like blockchain and AI, and improving user experience, PayPal can boost its competitive edge. Expanding ‘buy now, pay later’ and entering emerging markets would fuel growth while focusing on security and simplicity, building trust and reinforcing its position as a digital payments leader.

PayPal’s Valuation Discount: A Strategic Buy Opportunity?

The concept of margin of safety refers to the difference between a stock’s market price and its intrinsic value, offering a cushion for investors against potential downside risks. In PayPal’s case, the intrinsic value is around $90, while the current market price is $81.35. This difference suggests a margin of safety of 9%, meaning investors are potentially paying less than the stock’s estimated worth, which reduces the risk if the company’s growth expectations are not fully met.

Source: yiazou.com

One key reason investors may want to consider an investment in the stock is for valuation purposes. Currently, PayPal trades at a forward price to sales of 2.5 and at a substantial 58.52% discount to its five-year average P/S of 6.03, which could suggest that PayPal is undervalued in the market. In addition, the forward P/E ratio of 17.32, while up 41.73% from the sector median, has yet to reach a commonly accepted discount relative to PayPal's five-year average P/E, which presently trades 43.97% cheaper than its historical average, considering recent pressures on growth.

Source: Simply Wall Street.

In addition to attractive valuation metrics, there is a commitment to creating long-term value from PayPal in its free cash flow and shareholder returns. For Q3 2024, the free cash flow generation by PayPal stood at $1.4 billion, up 31% YoY, underlining strong cash generation capability. During Q3 2024, PayPal returned $1.8 billion to its shareholders through share repurchases, a total of $5.4 billion over twelve months, and decreased outstanding shares by 7%. This capital allocation strategy underpins PayPal's share price and speaks volumes of management's confidence in the company's intrinsic value.

Takeaway

In summary, PayPal's transaction growth, strategic cost control, and generally attractive valuation make it a very attractive investment. The company's ecosystem continues to develop and benefits greatly from user loyalty and significant service diversification. Meanwhile, PayPal can maintain a stable profit margin due to operational efficiency and cost management even if revenue growth slows down.

On a valuation basis, PayPal's metrics reflect an attractive entry point for investors steeped in upside potential against historical and sector benchmarks. Therefore, PayPal combines resilience with upside for investors in the digital payments area, maintaining a balanced risk-reward profile with significant growth possibilities over the coming years.