PayPal Earnings Review: A Strong Quarter, but Highly Competitive Industry
PayPal PYPL is one of the largest online payment solutions provider in the world. PayPal has a robust suite of products to enable smooth and secure transactions for both customers and merchants.
On Monday, May 8, after the market closed PayPal reported better than expected sales and earnings figures, beating analysts estimates. Total payment volume grew 10% YoY to $354.5 billion and EPS climbed 33% YoY to $1.17 per share. Management also raised guidance and announced that they expect to buy back $4 billion in shares by year end.
However, even after posting such strong results PYPL traded lower in after-hours trading. The digital payment solutions industry is a highly competitive one, and PayPal rivals include giants such as Visa V, Mastercard MA, Apple AAPL, Block SQ and others.
Stock Performance
PayPal stock had been on a steady trajectory higher for several years, matching the returns of legacy competitor Visa. However, following the Covid pandemic PayPal skyrocketed as investors blindly bid up shares of growth and technology companies. But the stock subsequently crashed nearly -80% in 2022 and performance is now flat over the last five years.
The stock seems to have put in a floor though and has been building a base over the last 12 months signaling investor interest again. Additionally, PYPL’s valuation is now as low as it has been since it was spun out into a public company in 2015.
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Industry Landscape
The payments industry is in the midst of transformation. More than ever, transactions are becoming cashless, whether online or in person. Thus, the competition to capture that shift is vigorous.
PayPal’s most direct competitor Block suffered an equally painful 2022, giving back five years of stock gains. Like PYPL, SQ is a rapidly growing company, with compelling products and a strong business model.
The two compete in several business segments. Primarily, PayPal’s Venmo and Block’s CashApp, are direct competitors in peer-to-peer payments. Both are important contributors to topline growth as well as customer onboarding.
These aren’t the only places where the contest for market share is fraught with contenders. Payment processing, tap and go payments, digital cards, online payments and peer-to-peer involve some of the biggest names in corporate America. Visa, Mastercard, Apple, Alphabet GOOGL, Bank of America BAC and JP Morgan JPM all have a stake in how the industry plays out.
Valuation
PayPal is currently trading at a one-year forward earnings multiple of 20x, which is below its eight-year median of 44x, and just off its low of 19x. Because of PYPL’s historically low valuation it may become an acquisition target. As one of the most competitive industries in the market, and one that is laser focused on network effects, it might make sense for larger incumbents like Visa or Mastercard to come in and buy it.
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Bottom Line
PayPal’s quarterly results showed continued strength in key metrics, yet it still wasn’t enough for investors. Shares are down more than -10% on Tuesday following the earnings call. Nonetheless, PYPL still has a compelling business model and is trading at a historically low valuation. PayPal has clearly carved out a niche in online payments, and continues to grow its secondary businesses, and whether it continues on its own, or is acquired it should continue to generate considerable value for investors.
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