PayPal Holdings Inc (NASDAQ: PYPL) - November 10, 2019 - Queen's Capital
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PayPal Holdings Inc (NASDAQ: PYPL) November 10, 2019
Table of Contents
I. Executive Overview 2
II. Overview of PayPal 3
III. Digital Payments Industry Overview 5
IV. Investment Thesis I 7
V. Investment Thesis II 8
VI. Investment Thesis III 9
VII. Catalysts & Risks 10
VIII. Valuation 12
1
Executive Overview
Queen’s Capital Recommends to Keep Stock on Watchlist
• An American company operating a worldwide online payments system that
supports online money transfers; an electronic alternative to traditional paper
Company methods, such as cash, checks and money orders
Description • The company acts as a payment processor for a variety of online vendors and
charges a fee in exchange for benefits such as one-click transactions and
password memory.
• The company has an incredible growth potential across its payment ecosystem
• It is executing on its strategy of selectively acquiring companies to expand its
Investment
product offerings
Highlights
• Venmo is a particularly interesting part of the business with an optimistic
monetization potential
• PayPal is an expensive stock compared to industry peers
Valuation
• The intrinsic valuation also indicates it is overvalued right now
• Hold: Continue to monitor the company and look for an opportunity to Buy PYPL at
Recommendation
a cheaper price
2
Overview of PayPal
Business Overview Revenue Breakdown
Business Description By Business Segment By Geography
• PayPal Holdings is a technology platform company enabling
digital and mobile payments for consumers and merchants
around the world
11%
Value Proposition - Consumers
• Reduces transaction friction in payments and peer-to-peer
money transfers 53%
Value Proposition - Merchants
• Quick onboarding process with no setup or recurring fees for
47%
standard service
• End-to-end payment solution that provides authorization and
89%
settlement with the potential for instant access to funds
• Online merchants realize higher conversion rates as users who
checkout with PayPal are less likely to abandon their cart
• Offers suite of services to businesses including lines of credit Transaction Fees Other Fees USA International
Strategy Overview Management Overview
• PayPal estimates that they already have a large share of the
increasingly competitive checkout market
• However, they view their value proposition as more of a
platform, rather than just a checkout button
• Constantly improving their core product by consistently reducing
payment frictions
Dan Schulman John Rainey Jonathan Auerbach
• Engaging in strategic partnerships with companies such as CEO CFO CSO
Uber, Instagram Shopping and Facebook Marketplace
• Appointed CEO in in • Appointed CFO in • Appointed CSO in
• No intention of becoming a bank, but rather continue to expand July 2015 August 2015 Sept. 2016
partnerships with banks • Founding CEO of • Previously CFO of • Previously held
• Intends to innovate at the front end (cards, merchants, Virgin Mobile United Airlines executive roles at
processing) where they believe they can capitalize on higher • Increased revenue by • 20+ years of financial McKinsey &
margins 4200% over 2-year management Company and Singtel
tenure as CEO of experience • 30+ years of relevant
Priceline.com experience
3
Overview of PayPal (Cont’d)
Capitalization Table ($mm, except for share
Price / Volume Chart
price)
Share Price (7-Nov-2019) $101.40
$140 50
Million
Shares Outstanding 1,174
45
$120
Market Capitalization $119,086
40 (-) Cash & Cash Equivalents $10,462
$100 (+) Total Debt $5.477
35
(+) Minority Interest -
30
$80 Enterprise Value $114,101
25
Key Market Statistics
$60
20
Share Price $101.4 52-Wk Range $75.47 -$121.48
15
$40
Market Cap $119,086 Enterprise Value $114,101
10
$20
5 LTM Revenue $17,127 LTM EBITDA $2,410
$0 0
16-10-15 16-10-16 16-10-17 16-10-18 16-10-19 LTM P/E $50.31 LTM EPS $2.13
4
Industry Overview
Digital and Mobile Payments Industry
Highly Competitive Market Place
Market Share (Number of Websites)
Acquirers
Paypal
18% Card
Networks
Stripe
4%
PayPal Market
Gateways
Share ≈ 60%
18% 60% Amazon Pay
Issuers
Others
ISOs /
MSPs
Swell in Global Mobile Payments Industry
• The global mobile payments market was valued at $897 bn in
Global Non-Cash Transactions ($bn)
2018 and is expected to reach $3.7 tn in 2024, growing at a CAGR
of 27% over the period
• There are an increasing number of mobile devices, high-speed
111 cellular networks, data analysis tools and omni-channel vendors,
90 so e-commerce and mobile payments are becoming increasingly
74 270
62 209 important in the modern economy
49
124
161 • The companies in the space are rigorously investing in mobile
96
156 170 186 payment technology owing to significant growth
134 144
48 51 54 • e.g. WhatsApp working with ICICI bank to introduce mobile
43 46
193
payment feature through UPI (Unified Payments Interface)
161 168 176 185
• The industry is moving towards fragmented state due to the
2017 2018 2019E 2020E 2021E increasing prominence and ease of use and entry of new players
that are still at an early stage (e.g. Apple Pay, Google Pay)
North America LATAM Europe Emerging Asia CEMEA
Sources: Company Reports, Datanyze
5
Industry Overview (Cont'd)
Digital and Mobile Payments Industry
Mobile Payments Business Model
PayPal Profitability Overview ($ million) Two revenue streams:
• Customer transaction process fees: 3.7% + $0.30
$16,000
• Value-added services: interest fees earned on loans and interest
$14,000 receivable
$12,000 • Variable Purchase APR 25.9% (Min interest charge
$2.00)
$10,000
Key expenses:
$8,000 46% • Operating expenses: transaction expense (26% increase in
$6,000 2018), general and administrative, transaction and loan loss,
$4,000
marketing, restructuring
13% • R&D expenses: $1,100 mm, $953 mm and $834 mm in 2018,
$2,000 2017 and 2016 respectively
$0 3 key performance metrics:
2015 2016 2017 2018 • Number of active accounts – 267 mm
Net Income Gross Profit Revenue
• Number of payment transactions – 9.9 bn
• Total payment volume (TPV) - $578 bn
Evolving Technologies and Regulations
Issues:
NFC, intuitive user surfaces, internal & external APIs, etc. • Disclosure, reporting, anti-money laundering, capitalization, fund
management, corporate governance, privacy, data protection,
information security, banking security, taxation, sanction etc.
Government Controls:
• U.S. & EU Anti-Money Laundering and Counter-Terrorist
Financing
Consequences:
• Business inconsistencies, expansion delays, additional costs,
operation restrictions, potential lawsuits, etc.
Takeaway: Payment systems like PayPal do not challenge the fiat
currency system currently in place like cryptocurrencies or
Facebook’s Libra does, easing the regulatory challenge for
governments
Sources: Company Report
6
Note: The Mobile Payments Business Model section refers only to PayPal because of a lack of available data for competitors
Investment Thesis I
Robust Acquisition Pipeline
Acquisition of iZettle in May 2018 for $2.2 bn Acquisition of GoPay in Sep 2019 for 70% Stake
Company Overview: Company Overview:
• Provides small-business tools and a payments platform that is • GoPay has licenses for online and mobile transactions, and
widely used across Europe and Latin America provides payment products for industries including e-commerce,
• The platform is used by 500k+ businesses, supplying mobile cross-border commerce, and aviation
card readers, invoicing software, POS systems, and offering a • Partner with China's financial institutions and technology
suite of smart analytics platforms, providing comprehensive payment solutions to
• Most popular product is the iZettle Reader businesses and consumers in China and globally
• Considered the “Square” of Europe
Synergies: Synergies:
• Expansion in Europe and Latin America • PayPal will be the first foreign payment platform to provide
• Expansion in small-business services online payment services in China
• Expansion into brick-and-mortar physical retailers • Expansion in China, where PayPal does not operate in
• Mobile payments market is expected to grow 21.8%, from 2017
to 2023, resulting in a ~$97 tn market size
Global Coverage of PayPal and Subsidiaries PayPal’s Number of Acquisitions
4 4
3 3
2
1 1
0 0
2011 2012 2013 2014 2015 2016 2017 2018 2019
“We have a healthy balance sheet and we are ready to put it to
work to buy more companies… we are ready to invest up to $3
Only PayPal With No PayPal or billion a year on acquisitions” – CEO Daniel Schulman
GoPay
PayPal Subsidiaries Subsidiaries
Sources: Company Reports
7
Investment Thesis II
Growth and Success of Venmo
Overview of Venmo Total Payment Volume ($bn)
• PayPal acquired Venmo as a subsidiary of their acquisition of 24.0
Braintree in December 2013 for $800 million 21.0
• Venmo offers peer-to-peer (P2P) payments through their mobile 18.8
16.7
app, where users can charge people money, pay them, and split
14.2
bills using the platform 12.3
• Popular among millennials, who are constantly transferring 10.4
9.4
small sums of money and enjoy an app that is very easy to use 8.0
6.8
and fast to process payments 4.9 5.6
• They are the market leader in peer-to-peer payments in the US, 3.2 3.9
with major banks lagging in creating their own mobile payment
app
• Free to use for debit cards and bank accounts, credit cards Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
carry a 3% fee 2016 2017 2018 2019
Mobile P2P Payments Adoption by Generation Key PayPal Milestones
40%
Venmo October 2017: More than 2 million U.S. merchants enabled to
34%
35%
Zelle
accept Pay with Venmo
30% January 2018: Launch of instant cash out on Venmo
26% 25%
25% April 2018: Grubhub adds Venmo as a payment option
20%
20% June 2018: Launch of Venmo debit card
14%
15% July 2018: Uber adds Venmo as a payment option
11% 10%
10% March 2019: Chipotle partners with Venmo to give away money
5%
5% and have a custom Chipotle emoji when transfers are made
0%
October 2019: 35% of active users have engaged in a
Young Millennials Older Millennials Gen Xers Baby Boomers monetizable experience
(21-29) (30-38) (39-53) (54-72)
Sources: Company Reports
8
Investment Thesis III
Strong Ecosystem for Money Transfer and Handling
Payments Beyond the Transaction PayPal SMB Lending Results
• With PayPal and Venmo dominating the digital payments 12 250,000
ecosystem, anyone can be a merchant and any device can be 10
an acceptance device 10
200,000
• Payments that were location bound are now device enabled
• Merchants, especially small and medium businesses (SMBs), 8
150,000
are attracted by efficient online payment methods 6
• PayPal provides other value-adds to SMBs, including fraud 6
prevention, data analytics, and risk management 100,000
4
• Unlike traditional banks, PayPal offers an array of credit 3
products to SMBs, addressing specific pain points: access to 2 50,000
2
credit and lengthy application processes, causing a recalibration 0.5
in the traditional payments network 0 0
• SMBs using PayPal for working capital loans see an average 2015 2016 2017 2018 2019
growth rate of 21%, with 88% of borrowers seeing growth in the
Cumulative Volume ($bn) Businesses Served
first three months
The Role of Gen Z Gen Z: Monthly Use of Digital Payments
• Holding $44bn in global buying power and projected to make up
40% of the U.S. consumer base by 2020, Gen Z are the 1-5 times 46%
payments industry’s future consumer base
• Disruptions in the traditional payments ecosystem are driven by
younger consumers, who are forging their payment habits
6-10 times 13%
around digital products such as PayPal
• 68% of Gen Z consumers are interested in instant P2P
payments – more than any other age group
• 69% of Gen Z consumers use mobile banking apps daily, 10+ times 11%
compared to the 17% of Baby Boomers
• Displays a massive generation gap in banking preferences that
will continue to grow, forcing traditional players to up their digital Never 30%
offerings value for survival
Sources: Company Reports and Investor Presentations
9Catalysts
Monetization of Venmo’s User-base Global E-Commerce Payment Share
• PayPal’s ability to monetize Venmo users has lagged the
incredible user growth that Venmo has shown PrePay
• Venmo has been a drag on PayPal’s margins, but that is 3%
5%
beginning to change 6%
8% eInvoices
Venmo’s % of Monetized Users
33% 35% 11%
29% 31%
11% PostPay
24%
11%
Pre-Paid Card
12%
Cash on Delivery
17%
Q3 Q4 Q1 Q2 Q3
2018 2019 23% Charge & Deferred Debit
Card
Growing List of Key Corporate Partnerships
Bank Transfer
PayPal recently struck a large deal in order to be the lead payment
processor for Uber by investing $500 million in the company ahead
Debit Card
of the IPO earlier this year 47%
✓ PYPL was up 2.0% a week after the announcement date
PayPal also became a payment partner for Instagram’s new social 36% Credit Card
shopping experience
✓ PYPL was up 1.6% a week after the announcement date
eWallet
Another partnership that PayPal closed in 2019 was with
MercadoLibre, which is considered the “eBay of Latin America”
✓ PYPL was up 4.1% a week after the announcement date 2018 2022E
In the short-term, monetizing Venmo and adding corporate In the medium-term, this industry trend will help increase
partners will increase Venmo’s stock price PayPal’s prominence in the fastest growing retail segment
Sources: PayPal’s Q3 Investor Presentation, Worldpay’s 2018 Global Payment Report
10Risks
PayPal is now exposed to the same risks as the world’s largest financial institutions
R1 Growing Competition R4 Reliance on Third-Party Providers
• The global payments industry is highly competitive, very innovative, • PayPal is dependent on banks and other payment processors to
and the industry is increasingly being subject to regulatory scrutiny process transactions
• Larger businesses in the same industry with a more dominant • Occasionally, payment card networks have increased fees that they
market position may be able to respond more quickly to these charge for each transaction that uses their network
regulatory and technological changes • These networks have previously imposed, and could impose in the
future, special fees for transactions that pass through “digital
wallets,” which would increase PayPal’s costs
R2 User Security and Reputation Risk • To counter the risk, PayPal has strategic partnerships in place with
Visa and Mastercard and other credit card networks that prohibit
• The collection, storage, processing, and transmission of customers’
these partners from imposing fees that solely target PayPal, but
personal and financial data is fundamental to PayPal’s business
these strategic partnerships have expiration dates
• PayPal’s reputation is built around it being a secure and effective
way to make payments
• In 2016 and 2017, hackers launched attacks against PayPal and
other internet-based companies to attempt to gain unauthorized
Highly
access to user data
Likely
• These types of hacks are becoming increasingly sophisticated, and R1
a successful and major hack of PayPal’s trove of personal data
could severely damage its reputation with its users
R3 Global and Regional Economic Conditions
R3
• PayPal’s operations are greatly dependent on economic conditions
regionally and globally
• Factors that may cause PayPal’s financial performance to R2
deteriorate are:
• Tighter credit
• Higher unemployment
• Consumer debt levels or reduced consumer confidence Not R4
• Financial market volatility Likely
• Forex and interest market fluctuations
• Shutdown of U.S. federal government Low Impact High Impact
11Valuation
Discounted Cash Flows
Free Cash Flow Analysis Historical Data Near-Term
Fiscal year 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E Terminal Year
Revenue 10,842 13,094 15,451 17,644 20,732 24,360 28,258 32,214 36,724
COGS 4,434 5,430 6,855 6,851 8,758 10,291 11,925 13,594 15,498
Other Operating Expenses 4,822 5,537 6,402 8,066 8,859 11,157 12,942 14,754 16,820
Operating Income (EBIT) 1,586 2,127 2,194 2,727 3,115 2,913 3,391 3,866 4,407
Net Income 1,364 1,744 1,909 2,424 2,676 2,502 2,913 3,321 3,786
Plus: D&A 724 805 776 904 1,191 1,399 1,623 1,850 2,109
Less: CapEx 669 669 820 792 1,146 1,340 1,554 1,772 2,020
Less: Increase in NWC 1824 927 (2723) (217) (627) (589) (630) (642) (732)
Unlevered FCF (405) 953 4,588 2,754 3,347 3,150 3,612 4,041 4,607 132,203
Discount Rate 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 10.8%
Discount Period 0.25 1.25 2.25 3.25 4.25 5.25 5.25
PVFCF 2,697 3,017 2,613 2,758 2,839 2,979 77,163
Growth Y/Y %
Revenue 17.2% 20.8% 18.0% 14.2% 17.5% 17.5% 16.0% 14.0% 14.0% 5.0%
EBIT 8.6% 34.1% 3.1% 24.3% 14.2% -6.5% 16.4% 14.0% 14.0%
Key Ratios
COGS (% of Sales) 40.9% 41.5% 44.4% 42.2% 42.2% 42.2% 42.2% 42.2% 42.2%
Other Operating Expenses (% of Sales) 44.5% 42.3% 41.4% 45.7% 45.8% 45.8% 45.8% 45.8% 45.8%
Tax Rate 14.0% 18.0% 13.0% 11.1% 14.1% 14.1% 14.1% 14.1% 14.1%
Depreciation & Amortization 6.7% 6.1% 5.0% 5.1% 5.7% 5.7% 5.7% 5.7% 5.7%
Capital Expenditures (% of Sales) 6.2% 5.1% 5.3% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
Gordon Growth Method Terminal Multiple Method
PV of Forecasted FCFs 16,903 PV of Forecasted FCFs 16,903
PV of Terminal FCF 77,163 Terminal Value
Total PV of FCFs 94,065 Terminal Year EBITDA 6,516
EBITDA Multiple 20
Value of Cash 10,462
Terminal Value 132,203
Value of Debt 5
PV of Terminal Value 85,487
Total Equity Value 104,522 Enterprise Value 102,390
FD Shares Outstanding 1,174 Less: Net Debt (10,457)
Total Equity Value 91,933
Intrinsic Value/Share 89 FD Shares Outstanding 1,174
Current Share Price 101 Intrinsic Value/Share 78
Upside % (12.2%) Current Share Price 101
Upside % (22.8%)
Notes: Separated Transaction expenses and Transaction and loan losses from operating expenses and put them in COGS
12Valuation
Comparable Companies Analysis
US$ millions, except per share data Price /
Market Enterprise Total Revenue Price / Earnings Price / FCF ROE
BV
Capitalization Value LTM
LTM 2019E 2020E LTM 2019E 2020E LTM 2018
Mastercard Incorporated $ 278,779 $ 281,246 $ 16,276 35.0x 31.2x 31.0x 41.2x 36.0x 27.9x nmf 110%
Visa Inc. $ 387,222 $ 397,339 $ 22,977 28.4x 28.4x 28.1x 27.8x 24.9x 19.5x 12.0x 32%
Global Payments Inc. $ 50,874 $ 59,052 $ 3,805 27.7x 24.1x 26.0x 15.7x 24.2x 20.8x 1.8x 20%
FIS Inc. $ 81,091 $ 99,996 $ 9,158 23.8x 21.7x 16.4x 20.5x 19.1x 17.8x 1.7x 9%
Median $ 179,935 $ 190,621 $ 12,717 28.0x 26.3x 27.1x 24.2x 24.5x 20.1x 1.8x 26%
Mean $ 199,492 $ 209,408 $ 13,054 28.7x 26.3x 25.4x 26.3x 26.0x 21.5x 5.2x 43%
PayPal $ 120,719 $ 115,734 $ 17,037 32.9x 30.1x 29.2x 26.8x 26.8x 22.7x 7.2x 17%
Key Takeaways:
• PayPal and its competitors are trading at very high multiples, reflecting the strong historical and projected growth for the industry
• PayPal has demonstrated consistently strong return on equity, although it still lags the two powerhouses (Visa and Mastercard)
• PayPal’s size and market share are reflected in the higher multiples it receives compared to smaller industry counterparts
13Valuation
Summary
PYPL stock price = $101.42
DCF: Terminal Multiple Method
DCF: Gordon Growth Method
Price / FCF 2020E
Price / FCF 2019E
Price / FCF LTM
Price / Earnings 2020E
Price / Earnings 2019E
Price / Earnings LTM
$30 $40 $50 $60 $70 $80 $90 $100
Key Takeaways:
• PayPal seems overvalued relative to its industry competitors
• The intrinsic valuation is much closer to PayPal’s current share price, and with less conservative assumptions the current share price
seems reasonable
• PayPal will need to fulfill its strong growth potential to live up to its current market valuation
14Queen’s Capital Financial Institutions Group
Thank You
Asher Levinson Vanessa Liu Domenico Tullo Matt Walker Elizabeth Kim
Senior Portfolio Manager Portfolio Manager Analyst Analyst Analyst
Queen’s Capital Queen’s Capital Queen’s Capital Queen’s Capital Queen’s Capital
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