Elevating Future Growth, Streamlining Operations And Expanding Services Shapes Success

Key Takeaways

• Introduction of Fastlane and operational improvements like passwordless processes are poised to boost transaction volume and efficiency, enhancing revenue and margins.
  
• Expanding PayPal Complete Payments Platform and revamping the PayPal app aim to increase engagement and average revenue per account, positively impacting revenue growth and net margins.
  
• PayPal's transition year focuses on execution and making critical choices, facing financial instability, relying heavily on new services, and risks from operational efficiency investments and business divestitures.

Catalysts

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

• The launch of Fastlane by PayPal is expected to significantly boost merchant conversion rates, especially with a noted nearly 80% conversion rate for returning Fastlane users. This should directly impact revenue and net margins by improving transaction volume and efficiency for merchants.
  
• PayPal's focus on operational improvements, including efficiency drives and a shift towards more passwordless authentication processes, will likely enhance user experience and conversion rates, translating into higher revenue and improved margins.
  
• The introduction of PayPal Complete Payments Platform (PPCP) and its expansion into over 34 countries, as well as the enhancement of low- and no-code integration tools, are expected to drive adoption among small- and medium-sized businesses (SMBs). This will potentially double the average revenue per account for PPCP full-stack merchants as compared to SMBs on legacy integrations, directly impacting revenue growth.
  
• Revamping the PayPal app and enhancing its rewards program are designed to increase shopper engagement and transaction margins. This, combined with efforts to introduce more value for consumers, could lead to a rise in transaction activity and an increase in average revenue per account, positively affecting revenue and net margins.
  
• The plan to leverage artificial intelligence for PayPal's Fraud Protection Advanced, especially with clients like DraftKings, by offering differentiated, value-added services could enhance PayPal's competitive edge and ability to price to value, potentially elevating both transaction volumes and margins.

Assumptions

• Analysts are assuming PayPal Holdings's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.3% today to 13.0% in 3 years time.
• Analysts expect earnings to reach $5.0 billion (and earnings per share of $5.5) by about October 2027, up from $4.4 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $5.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2027 earnings, up from 18.3x today. This future PE is greater than the current PE for the US Diversified Financial industry at 15.7x.
• Analysts expect the number of shares outstanding to decline by 3.72% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.86%, as per the Simply Wall St company report.

Risks

• A transition year for PayPal with a focus on execution and making critical choices for future success could lead to short-term financial instability, impacting revenue and earnings growth as they navigate substantial operational retooling.
  
• Heavy reliance on the successful adoption and market penetration of new services such as Fastlane, and PayPal Complete Payments Platform, implies execution risk which may affect transaction margins and overall profitability if these initiatives do not perform as expected.
  
• The strategy to price to value, particularly in discussions with large enterprise customers about PayPal's value-added services, involves the risk of potential revenue disruption if negotiations result in lower-than-expected price increases or if the uptake of new pricing models is slower than anticipated, affecting earnings.
  
• Investments in operational efficiency and technology (e.g., automation, AI for fraud management) carry the risk of not achieving the expected cost savings or efficiency gains in the near term, potentially diminishing margins.
  
• The ongoing evaluation and potential divestiture or de-prioritization of underperforming services or segments of the business could result in short-term disruptions and costs that negatively impact net margins and earnings.

Valuation

• The analysts have a consensus price target of $83.74 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 $68.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $38.5 billion, earnings will come to $5.0 billion, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 6.9%.
• Given the current share price of $79.55, the analyst's price target of $83.74 is 5.0% 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.