7 min read

Will PayPal Stock Go Up? 🤔PYPL PayPal Stock Analysis

With PayPal taking a serious beating lately, you must be wondering... will this thing go back up? Short answer: yes. It's taken a beating more than it deserves, and is now in oversold territory. /my opinion
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With PayPal taking a serious beating lately, you must be wondering... will this thing go back up? Short answer: yes. It's taken a beating more than it deserves, and is now in oversold territory. /my opinion

Let me explain why I think so...

Business Model

You probably have a good idea of this already, so I won't go into detail as it's likely not necessary and it's pretty basic at a high-level. Essentially, PayPal is a fintech company acting as a payment processor and two-sided platform. One one side you have merchants (or sellers) who are selling their goods/services and using PayPal as a trusted payment processor; and on the other side you have consumers using PayPal as secure method of payment for shopping on vendor websites, or sending payments, etc. It can also be used as a means of sending payments to family and friends.

They're completely regulated, and have been around for a while... one of the first players in this space. In fact, PayPal has almost 300 million customers, over 20 million active merchant accounts, and billions of transactions conducted every year. BIG NUMBERS.

A high-level visual how PayPal processes transactions

PayPal acts a digital wallet, where you can securely store money and your credit/debit information. This information is never shared with the people you're sending money or transacting with on the other end. So their value proposition is convenience, security, and a globally trusted brand. They've attained large adoption through this, and exceptional customer service for the consumer. They're much easier (in my opinion) for consumers to win chargebacks and contest payments, etc. – which can be a nightmare for vendors... especially when they put hold on your balances! I'm talking from experience here.


If you didn't know, PayPal was actually founded in 1998 under the name Confinity by Peter Thiel (Palantir) and Max Levchin (Affirm), and was later acquired and merged with X.com – which was co-founded by Elon Musk (Tesla). The two companies gave birth to what we know now as PayPal.

As you can tell, there were a group of straight bosses in PayPal's founding team – which is why they coined the term the "PayPal mafia". These guys are unarguably among the top entrepreneurs of our time.


PayPal was acquired by eBay in 2002, at which time all these guys cashed out big. For a lot of them, it was their stepping stone to new journeys and companies. For PayPal, this was a great partnership to grow, since it helped grow its user base. The companies later split in 2015. That split went a step further recently as eBay announced it will no longer allow PayPal transactions on its marketplace... and vendors will have to use eBay's own internal processing. Smart move by eBay to get added revenues (i.e. similar to Shopify's well-executed partnership with Stripe) but kind of late, imo. Either way, this does slow down PayPal's growth, but not in a meaningful way tbh. I'm not worried about that, at all.

So, how do they make their money?

At a very high level, transactions fees and value-added services.

You can see below, they offer a lot of other services they make money from. But, the bulk of their revenues are from transactions fees and their revenues are a direct correlation of total payment value (TPV) which you'll see in our valuation. Which makes sense since they charge merchants a fee of 2.9% on the amount they receive as a sale + $0.30/transaction.


Venmo is a PayPal-owned app that is worth noting, however, given its increasing popularity... and the popularity of more peer-to-peer payment apps. It's free to download and send money (through your bank/debit card), but charges 3% if sending payment via credit card.

Similar to PayPal, vendors can setup payment via Venmo API – which would charge them 2.9%. So, the exact same model as PayPal, but to a different user base. P2P mobile-first payment apps like Venmo are especially popular with younger demographics like Gen-Z.

As you can see in the above charts, Venmo is growing fast, but its TPV is still a drop in the bucket against PayPal as a whole. But, the growth rate is much faster – which you can see how it's comparing against its competitors like Square and Zelle (which is owned by the largest banks).

But, the cherry on top, is Venmo's recent partnership with Amazon. Amazon, will now be accepting Venmo at it's checkout starting 2022. This is HUGE for Venmo, as this can significantly increase the TPV and revenues.

The news came in at the same time as an analyst downgrade for PayPal, the rumored Pinterest acquisition, and Affirm being accepted as a BNPL option in Amazon as well... so, honestly I don't think the Venmo/Amazon partnership is priced in at all.

That being said, let's dive into valuation.


As usual, it's probably easier to watch the YouTube video to getter grasp these points... and the full spreadsheet is available for premium members of the Hawk Letter. But, essentially, I do believe that PayPal is undervalued.

The three major non-financial metrics which measure business performance for PayPal are active accounts, number of payment transactions, and TPV... TPV being the most important and revenue-correlated. It's pretty difficult to imagine anything less than double digit growth for TPV until 2024. I don't think anyone can that.

I've forecasted 20% CAGR for TPV, leading to a similar CAGR for revenues. I've double-checked this with analyst means, and it's aligned.

Their revenues are typically 2% of TPV – which I assumed no change.

I also assumed a slight increase in margins with scale.

Taking all these assumptions to my DCF, I get a fair value per share of $290 – more than 50% upside from where it's trading today.

After factoring in some compression in the price to FCF, sales, and earnings (which was historically been 35x pre-pandemic) we get a price target of $284.

I think this is very reasonable, and a very healthy upside.


But, of course (as with anything), there's risk.

Interest rate risk - PayPal is not a cheap, value stock. It's a growth stock at the end of the day, that happens to be (in my opinion) on sale. That doesn't mean it won't see volatility. It will. Growth stocks can have a slump in the economic environment we may be headed into... nobody knows. So, you just have to be aware and position your portfolio according to your risk profile.

Fintech disruption - The main business risk can come from PayPal being irrelevant. It happens to all the best companies, when they fail to innovate. The innovation right now is happening in crypto, which PayPal is trying to include in their platform. There is also thread of "super apps" like SoFi (also a great company), and most notably buy-now-pay-later (BNPL) platforms. BNPL is being adopted widely by consumers, and PayPal has implemented their own but is very late to the party and not growing it nearly as fast as it should be (in my opinion) to compete with the likes of Affirm. I do think PayPal has a huge competitive advantage of its large user and merchant base. Switching their merchants to BNPL would be seamless, but they need to execute this well. I really hope they do, otherwise that's a real threat.


In summary, however, I do think the prices here for PayPal are attractive... which is why I myself have started a position. I usually start my position in and average the buy price opportunistically. So, if we see more dips, I will continue to lower my average. I think right now is a great time to start a position in PayPal, if it was too expensive for you earlier – which was the case for me.

However, I do think that the BNPL platforms and competition needs a close eye and see how PayPal is doing in this arena. Right now, PayPal's BNPL TPV is at a run rate of $8bn annually. This is, again, a drop in the bucket for PayPal as a whole – but the growth rate needs comparison with Affirm. The biggest "L" that PayPal took is by not securing the exclusive BNPL arrangement with Amazon. It lost that to Affirm, and that's going to be a tough one to come back from, imo.

If you'd like me to deep dive on Affirm, and compare to PayPal... let me know?

Anyways, thanks for reading, and wish you nothing but success!

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