The digital payment industry has been on a steady climb for many years given the e-commerce revolution. The Covid 19 situation, has further led to new users who usually would not have shopped online to come onboard. All these bode well for a good runway for further consistent growth ahead.
With the coming of the new era of Metaverse by Meta, where the future could be split between your virtual and physical world, the need for a digital wallet would be essential. The digital wallet could be used for keeping your digital currency, digital assets (NFTs) and other digital-related items.
Source: Mordor Intelligence
The transaction value of the digital payments market was USD 5.44 trillion in 2020, and it is projected to be worth USD 11.29 trillion by 2026, registering a CAGR of 11.21% from 2021 to 2026
Source: Mordor Intelligence
The global payments market is expected to grow from $466.29 billion in 2020 to $517.68 billion in 2021 at a compound annual growth rate (CAGR) of 11%. The market is expected to reach $735.39 billion in 2025 at a CAGR of 9.2%.
Source: Businesswire.com
The growth as predicted by both Modor Intelligence and Businesswire for the digital payment industry would be in the region of around 11% for the next 5 years. This is consistent growth rather than exceptional growth but one thing is for sure, it is still a sunrise sector. Hence, it is going to be a good place to look for potential investments.
Paypal- The Gateway to Digital Payments
Source: PayPal Annual Report 2020
PayPal would need no introduction as it has been around since 1998 where their famous co-founder, Elon Musk, is now the richest man in the world; courtesy of Tesla’s stake. It was part of eBay from 2002 till it was hived off in 2015 through an IPO. PayPal is therefore well entrenched internationally and not just in the US.
It has since evolved to include not only a payment mode but also a digital wallet, Venmo. You could use their app to trade cryptocurrencies and they are looking into shares trading too in the future. You are also able to store your digital assets (NFTs).
Paypal has also recently launched their digital credit card, Venmo Visa, where they have recently announced a collaboration with Amazon. They are also having their own Buy Now Pay Later solution to be up to par with competitors.
The vision for PayPal is to be a super app fighting the likes of Wechat, Alipay, Grab and Sea.Â
Financial Metrics
| Symbol/Stock Price | Price-Earnings | Price To Book | Debt to Equity | Return on Invested Capital | Return On Equity | Dividend Yield | Price to Sales |
| PYPL/ 193 | Â 46 | Â 10.3 | Â 0.36 | Â 15.6% | Â 24% | Â Nil | Â 9.3 |
| SQ/ 225 | 210 | 35 | 1.73 | 8.47% | 21% | Nil | 7.29 |
Source: Morningstar and Reuters
Based on the analysis of the Financial Metrics which we compared to their competitor Square which was set up in 2009. Their co-founder is Jack Dorsey who also helm Twitter. Given the earlier industry growth outlook of teens in the next 5 years, a PE of 46 would not be exactly in the bargain zone.
Nonetheless, comparing the average PE since 2016 of 57 (source: YCharts), we might be heading into a reasonable valuation zone based on the historical PE range.
Source: Gurufocus.com
Though they have a debt to equity of 0.36, if we include the cash holdings, it is in a net cash position. This gives PayPal a strong financial position. On the whole, it is a safer bet than Square in the payment sector but Square is growing at a much faster pace, they have also not expanded their base in the international markets yet.
PayPal has been the better capital allocator given its stellar return on equity and invested capital numbers.
This article by Motley Fool gives us good insights into the difference between these two payment companies and their positioning.
Paypal Historical Growth
Source: Reuters
Looking at the revenue growth from 2016 to 2020, the compounded growth rate was 18.6%. The growth in earnings outshoots the revenue growth by growing at a compounding rate of 31.6%. It was more commendable given their gradual loss of eBay business since 2018.
The payment agreement between eBay and PayPal was till June 2020- 5 years after their spin-off. At their spin-off (2015), eBay makes up to 50% of the profits for PayPal. It is just less than 4% of their total revenue and it could go to nil by 2023 as eBay is coming up with their payment solutions.
Why has PayPal fallen almost 37% from the Peak?
Based on the latest Q3 results, their growth quarter on quarter has slowed to around 13% for their revenue- factoring in a reduction of 46% revenue from eBay. Excluding eBay, revenue has grown at around the 25% mark over the past 2 years. Nonetheless, there was a reduction in guidance for Q4.
PayPal expects fourth-quarter adjusted earnings to be about $1.12 per share versus the estimate of $1.27 per share. The company expects fourth-quarter revenue to be in a range of $6.85 billion to $6.95 billion versus the estimate of $7.24 billion.
Also, PayPal expects growth for 2022 to be around 18% which falls short of analysts estimates at 22%. This disappointing outlook has led to the recent share price weakness.
Their recent interest in Pinterest has also gathered mixed reactions with some critics highlighting that PayPal’s growth could be filtering off as they have to acquire non-core business to generate growth. Also, a move into e-commerce when they have spun off from eBay earlier seems to highlight the synergies might not work.
At 45 billion dollars, it is buying growth at a hefty price tag of 20x Price to Sales. Moreover, the co-founder, Evan Sharp, would be leaving Pinterest for LoveForm. Also, Pinterest was listed in April 2019 at just a valuation of 10 billion dollars but the deal would value it at 45 billion dollars.
From another angle, the social media investment could be a good move to capture more customers for their payment app with a whole new demographics. Also, social commerce is up and coming. The acquisition would help PayPal gain a foothold in this lucrative market, hence taking a step closer to the goal of being a super app with numerous features.
On the whole, we find the no-deal on Pinterest would be a net positive for PayPal, as it is not within their core business of digital payments.
Chartist Point of View
Source: Investing.com- PayPal chart
Looking at the charts, it is an ugly sight where it has fallen almost 37% from their peak of 310. It has just broken through the psychological 200 level last Friday. This is what catching a falling knife will look like.
Nonetheless, looking at the historical valuation from price to book and price to earnings, a bottom could be established soon as we are near their average and even below-average historical valuation.
Support would be found at firstly the 175–185 region. The next support would be the 145–160 region which coincides with our box method projection- price range of 240–310 forming the box used.
Summing Up
Given the digital payments industry outlook, the sector is still on a secular uptrend. The growth could be in the healthy teens’ region. With so much talk about Metaverse, it will likely lead to more growth if the scenario where virtual and augmented reality takes over a portion of our daily life.
PayPal, with their recent price drop, would be a safer proxy to invest in this sector given their pedigree and great track record.
PayPal is currently trading at forward PE of 36, which is the average mean for the past 5 years. We are therefore getting it at a reasonable valuation based on historical metrics. Moreover, it is in a net cash position and generating healthy positive free cash flow.
With eBay making up just less than 4% of their revenue, they are embarking and ready for an eBay-less form going into 2022. Without an agreement with eBay, they could have more latitude to tie up with other e-commerce platforms. This was shown through their recent collaboration with Amazon announced in the Q3 results briefing.
However, the chart is akin to a falling knife now. Potential attractive entry region would be firstly the 175–185 region followed by 145–160 region based on our charting analysis.
From a fundamental angle, if valuation drops below forward PE of 30, that could be another indicator that we will be investing in this established payment provider at a good price.
The fall in PayPal price could be seen as an optimal opportunity to pick up a great consistent growth stock at a reasonable valuation.
Disclaimer:
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
