Introduction
PayPal Holdings, Inc. is a leading technology platform that enables digital payments and simplifies commerce experiences on behalf of merchants and consumers worldwide. PayPal is committed to democratizing financial services to help improve the financial health of individuals and to increase economic opportunity for entrepreneurs and businesses of all sizes around the world. Their goal is to enable merchants and consumers to manage and move their money anywhere in the world in the markets they serve, anytime, on any platform, and using any device when sending payments or getting paid, including person-to-person (“P2P”) payments.
PayPal’s payment solutions enable their customers to connect, transact, and send and receive payments, whether they are online or in person. They provide proprietary payment solutions accepted by merchants that enable the completion of payments on their platform on behalf of our customers. Operate a global, two-sided network at scale that connects merchants and consumers with 435 million active accounts (consisting of 400 million consumer active accounts and 35 million merchant active accounts) across more than 200 markets as of December 31, 2022.
They offer their customers the flexibility to use their PayPal or Venmo accounts to purchase and receive payments for goods and services, as well as the ability to transfer and withdraw funds. Consumers can exchange funds more safely with merchants using a variety of funding sources, which may include a bank account, a PayPal or Venmo account balance, PayPal and Venmo branded credit products including our installment products, a credit card, a debit card, certain cryptocurrencies, or other stored value products such as gift cards, and eligible rewards. PayPal, Venmo, and Xoom products also make it safer and simpler for friends and family to transfer funds to each other. They offer merchants an end-to-end payment solution that provides authorization and settlement capabilities, as well as instant access to funds and payouts. Furthermore helps merchants connect with their customers, process exchanges and returns, and manage risk.
Revenues are gained, primarily by charging fees for completing payment transactions from their customers and other payment-related services, which are typically based on the volume of activity processed on the payments platform. They also generate revenue from customers on fees charged for foreign currency conversion, for instant transfers from their PayPal or Venmo account to their bank account or debit card, and to facilitate the purchase and sale of cryptocurrencies. Also company earns revenue by providing other value-added services, which are comprised primarily of revenue earned through partnerships, interest, and fees from our merchant and consumer credit products, interest earned on certain assets underlying customer balances, referral fees, subscription fees, and gateway services.
Strength of the company and Key Performance Metrics
The business model has been built on a strong foundation designed to drive growth and differentiate them from competitors. A critical element of their overall growth strategy involves increasing the engagement of active accounts, which will contribute to growth in payment transactions, total payment volume, and net revenues. PayPal's competitive strengths can be summarized into the following:
1. Two-sided network—Their payments platform connecting merchants and consumers enables PayPal to offer unique end-to-end product experiences while gaining valuable insights into how customers use the platform. The payments platform provides for digital and in-store (at the point of sale) transactions while being both technology and platform-agnostic.
2. Merchant and consumer choice— branded and unbranded card processing payment solutions support an open ecosystem that provides choice to both merchants and consumers, enabling flexibility to make and receive payments using a wide variety of different funding options and digital wallet solutions.
3. Scale—global scale helps PayPal to drive organic growth. As of December 31, 2022, the company had 435 million active accounts, consisting of 400 million consumer active accounts and 35 million merchant active accounts in more than 200 markets around the world. In 2022, they processed $1.36 trillion of TPV.
4. Trusted brands—The company has built and strengthened well-recognized and trusted brands, including PayPal, Braintree, Venmo, Xoom, Hyperwallet, PayPal Zettle, PayPal Honey, and Paidy. Communications and marketing efforts across multiple geographies and demographic groups play an important role in building brand visibility, usage, and overall preference among customers.
5. Risk and compliance management—The enterprise risk and compliance management program is designed to help secure customer information and to help ensure that the company will process legitimate transactions around the world while identifying and minimizing illegal, high-risk, or fraudulent transactions.
6. Regulatory licenses—The company believes that its regulatory licenses, which enable it to operate in markets around the world, are a distinct advantage and help support business growth.
Looking at the charts below, PayPal's active accounts were on a constant rise in previous years, but in 2022 the company experienced a slight decline in the increasing rate of active accounts, maybe from the constant increase of interest rates. On the other hand, a very positive sign is that PayPal’s transactions per account have increased during 2022 which means that the company offers quality services for their customers. Furthermore, looking at the total payment value (TPV) and the total transactions, it is clear that despite the decline rate on active accounts, the existing ones seem to be more engaged than before
Revenues, Profitability and Expenses
PayPal’s revenues can be classified into the following two categories:
Transaction revenues: Net transaction fees charged to merchants and consumers on a transaction basis based on the TPV completed on the payments platform. Growth in TPV is directly impacted by the number of payment transactions that the company enables on the payment platform. The company earns additional fees from merchants and consumers: on transactions when performing currency conversion, when enabling cross-border transactions (i.e., transactions where the merchant and consumer are in different countries), to facilitate the instant transfer of funds for the customers of PayPal or Venmo account to their bank account or debit card, to facilitate the purchase and sale of cryptocurrencies, as contractual compensation from sellers that violate the contractual terms (for example, through fraud or counterfeiting), and other miscellaneous fees.
Revenues from other value-added services: Net revenues are derived primarily from revenue earned through partnerships, referral fees, subscription fees, gateway fees, and other services. The company also earns revenues from interest and fees earned from the portfolio of loans receivable, and interest earned on certain assets underlying customer balances.
The company operates in the financial services sector which has, on average, medium growth in revenues with high operating margins and a high reinvestment rate. Revenue growth ranged between 15% and 20% last decade with an average growth of 17%. But from 2022 company has experienced a huge decline in revenue growth due to macro events and the highly competitive landscape.
Transaction expense
These costs include fees paid to payment processors and other financial institutions when PayPal draws funds from a customer’s credit or debit card, bank account, or other funding source they have stored in their digital wallet. The cost of funding a transaction with a credit or debit card is generally higher than the cost of funding a transaction from a bank or through internal sources such as a PayPal or Venmo account balance or our consumer credit products. As they expand the availability and presentation of alternative funding sources to their customers, the funding mix may change, which could increase or decrease the transaction expense rate. The cost of funding a transaction is also impacted by the geographic region or country in which a transaction occurs, as the company generally pays lower rates for transactions funded with credit or debit cards outside the U.S. Macroeconomic environment changes may also result in behavioral shifts in consumer spending patterns affecting the type of funding source they use, which could also impact the funding mix.
Customer Support and Operations
Customer support and operations include costs incurred in our global customer operations centers, including costs to provide call support to our customers, costs to support our trust and security programs protecting our merchants and consumers, and other costs incurred related to the delivery of our products, including payment devices, card production, and customer onboarding and compliance costs. Customer support and operations costs increased $45 million, or 2%, in 2022 compared to 2021. The increase in 2022 was primarily attributable to increases in expenses related to software that supports consumer loan products, customer onboarding and compliance costs, other operating charges, and costs associated with the production of PayPal and Venmo branded debit and credit cards, partially offset by a decline in contractors and consulting costs.
Sales and Marketing
Sales and marketing include costs incurred for customer acquisition, business development, advertising, and marketing programs. Sales and marketing expenses decreased $188 million, or 8%, in 2022 compared to 2021 due primarily to lower spending on marketing campaigns compared to the prior year and declines in employee-related and consulting costs, partially offset by an increase in amortization of acquired intangibles and payments made to the channel partners.
Technology and Development
Technology and development include costs incurred in connection with the development of the payments platform, new products, and the improvement of the existing products, including the amortization of software and website development costs incurred in developing the payments platform, which are capitalized. It also includes acquired developed technology site operations and other infrastructure costs incurred to support the payments platform. Technology and development expenses increased $215 million, or 7%, in 2022 compared to 2021 due primarily to increases in employee-related expenses and cloud computing services utilized in delivering their products and services, partially offset by a decline in costs related to contractors and consultants.
General and Administrative
General and administrative include costs incurred to provide support to our business, including legal, human resources, finance, risk and compliance, executive, and other support operations. General and administrative expenses decreased $15 million, or 1%, in 2022 compared to 2021 due primarily to declines in professional services and employee-related expenses due in part to a decline in stock-based compensation expenses, partially offset by an increase in costs associated with enterprise software services.
Valuation of PayPal Holdings Inc.
PayPal Holdings Inc. is a company that seeking, first to increase the active users and second to keep these users via various services. I have assumed that will gain high revenue growth from the high engagement of the services (buy now pay later, crypto-friendly company, peer-to-peer transaction via Venmo) but, high revenues will come only with high operating expenses (high transaction costs) and that's why I have assumed that operating margins will converge to 15% (like an average financial service company). Furthermore looking at the history of the company seems that makes investments with efficiency, relative to the other companies in financial services and I have assumed that will keep this effectiveness of the reinvestments. Finally, as a global company with a high transaction rate and competition, will face high risk and that's why I have more than double the cost of capital compared to a typical financial service company.
Value of PayPal Holdings Inc.
Terminal cash flow $839.39
Terminal cost of capital 4.58%
Terminal value $299,781.33
PV(Terminal value) $129,856.27
PV (CF over the next 10 years) $(10,038.27)
Sum of PV $119,818.01
Probability of failure = 0.00%
Proceeds if firm fails = $ 0
Value of operating assets = $119,818.01
- Debt $11,213.17
- Minority interests $-
+ Cash $5,504.00
+ Non-operating assets $-
Value of equity $114,108.83
- Value of options $0.00
Value of equity in common stock $114,108.83
Number of shares 1,114.00
Estimated value /share $102.43
Price $62.00
Price as % of value 60.53%