PayPal Holdings NasdaqGS:PYPL Stock Report

PayPal: On The Right Path To Growth

Finally, PayPal's management has cut its guidance to more achievable targets. As a result, it will be a relief from volatility due to negative surprises. The current strategy to focus on client engagement rather than new account opening is a step in the right direction. PayPal’s SuperApp has the potential to put the company way ahead of its competitors by increasing users' engagement and convincing them to keep their money within PayPal’s digital wallet. PayPal's unbranded payment gateway company, Braintree, demonstrated strong volume growth of 79% last year and remains one of the growth catalysts for the future. paypal.com's traffic data suggest a muted growth for the quarter, but the 24 downward revenue revisions provide ground for positive but limited surprise. Investment Thesis PayPal Holdings, Inc. (PYPL), the digital payments solutions provider, was investors' hot favorite as the fintech industry flourished during COVID due to extremely low borrowing costs and increased consumer spending. However, after reaching a peak of $308.5 in July 2021, the stock has been facing a lot of bashing and currently hovers around $88, down 54.6% YTD and around 72% from its all-time high. PYPL data by YCharts This downtrend resulted from numerous factors, such as multiples contraction in the tech sector, negative investor sentiments due to rumors of unrelated investments (intentions to buy Pinterest), disappointing Q3 and Q4 2021 results followed by revision of outlook and changes in strategy, etc. However, now that the management has cut its guidance to more achievable targets, there will be a relief from volatility due to negative surprises. On the one hand, I think the stock will still face headwinds in the near term as the e-commerce industry continues to struggle due to supply chain disruptions, record levels of inflation, and more returns to in-store shopping. In addition, eBay's move away from the PayPal platform has also been causing a loss in revenue. On the other hand, the market seems to have beaten the payment giant enough, and PayPal's business and growth strategies make it a very attractive long-term investment, supporting my buy rating. The Road To Becoming A Payment's Giant PayPal has been continuously investing in its growth to position itself as the market leader in the digital payments ecosystem that connects the consumer and merchants. Its platform has 429 million active accounts, including 35 million active merchant accounts, and it processes over a trillion payments annually. Through strategic acquisitions, it has expanded its products and offerings on both the consumer and merchant side. These offerings include payment processing, gateway, P2P, remittances, and related services such as POS, lines of credit, invoicing software, etc. In addition, the recent strategy to focus on client engagement rather than new account opening is a step in the right direction. Now, PayPal has ample infrastructure in place to keep payments revolving within its ecosystem and increase revenues through higher user engagement. PayPal's Evolution (investor.pypl.com) The All-in-one Digital Wallet: PayPal's SuperApp has the potential to put the company way ahead of its competitors. The market criticized the all-in-one app when it was launched in 2021. It was said that the US market did not need a super app, a concept quite famous in China and other Asian markets. However, the reality is that an all-in-one app is what the company now needs to boost user engagements and keep payments within its platform to increase margins. Some new app features such as Bill Pays, coupons/deals, high-yield saving accounts, crypto buying and selling, and QR codes are already rolled out. Other features that were initially planned, such as stock offerings and other crypto-related features, will take some time, subject to regulatory approvals. With these many features on one app, the user can essentially perform all kinds of financial transactions through PayPal's digital wallet. On top of that, choosing Buy Now Pay Later ((BNPL)) will further increase consumer spending through PayPal, as the BNPL industry is relatively new and expected to grow in the coming years. This will increase engagement and convince the users to keep their money within PayPal's digital wallet rather than using it just for checkout purposes. PayPal's Engagement Metric (investor.pypl.com) Unbranded Processing Business is Growing Braintree, the unbranded payment gateway and processor, owned by PayPal Holdings, has recently seen strong growth. While the company doesn't share exact volume, the management claims Braintree's volume growth was 79% last year, and the trend also remained strong in the first quarter. Among the Braintree platform's famous merchant users are Airbnb, Dropbox, Eventbrite, GitHub, yelp, etc. The management expects to have some more big names on board in the coming quarters. Braintree's integration into PayPal's up-to-date tech stack and the ability to allow payments through PayPal and Venmo makes it a very reliable payment processor. As a result, the growth prospects for this business are strong. Venmo's Monetization Strategy Is On Track Venmo is another success story of PayPal's strategic investment, and the growth expected from the app is phenomenal. Initially allowing P2P payments, Venmo now keeps on adding features to its app. Users can now set up business profiles to receive payments or pay at more than 2 million PayPal merchants across the United States. Venmo's TPV was $57.8 billion in Q1 2022, a 12% YoY growth. Venmo also allows its users to buy and sell four cryptocurrencies; thus, there is room for increasing fees on Venmo to be at par with market rates. Another milestone that will be very meaningful to Venmo's growth is its partnership with Amazon, whereby Amazon will allow payments through Venmo on its platform. Another thing to note is that the company has been aggressively buying back shares in recent quarters. Specifically, according to the CFO in the Q1 buyside call: You've seen us be more aggressive on buybacks the past few quarters; I'd expect that we would be buyers at this price. We think the intrinsic value of our business is far more than where we trade today.