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had “Strong buy” argument PayPal (Nasdaq:Pipple) shares in March. The recommendation is being maintained as the company’s shares have risen 6.3%, compared with a 4.3% increase in the S&P 500. The company continues to make progress with its revised strategy. Focus on profitable growth.
During yesterday’s conference call, the CEO reiterated the company’s commitment to continue innovating and constantly improving the customer experience. This is not just beautiful words, it is in line with recent efforts to expand partnerships and add features for cryptocurrency adopters. The move into the digital advertising business is a smart move as the company leverages a ton of customer behavior data thanks to the billions of transactions processed each quarter. Capturing 1 percent of this massive industry could bring PayPal billions of dollars in additional revenue. The strong Q1 results and the stock being fairly priced make the valuation very attractive. The value has fallen from $80 to $74. Due to all these favorable factors, I would like to reiterate my “Strong Buy” rating on PYPL.
Fundamental Analysis
CEO Alexander Chris said yesterday BofA Global Technology ConferenceThere were some bullish insights in his words. First, he emphasized that he is happy with the new management team. Having a team of experts who share the same strategic vision will help Chris lead PayPal. conversionSecondly, he said the company will continue to prioritize the most meaningful and impactful initiatives, compared to previous practices where it was too spread out across different initiatives. Thirdly, Chris emphasized the importance of speed of innovation to quickly provide better services to all members of the PayPal ecosystem.
Recent updates have confirmed that these three statements from the CEO are not just words. For example, the company recognizes the strong momentum in digital assets and: Recently Made The company has made its own stablecoin, PayPal USD (“PYUSD”), available on the Solana blockchain, and the company’s growing interest in cryptocurrencies makes it look like a promising venture. Statista Predictions Cryptocurrency payments are expected to grow at a compound annual growth rate (CAGR) of approximately 17% between 2023 and 2030.
PayPal also continues to expand its Venmo service. For example, starting in April, PayPal and Venmo team up The partnership with Visa+ peer-to-peer payment system will enable cross-platform remittances, strengthening the company’s ecosystem and making it more attractive to users who want to send money across different platforms.
Grand View Research
Another strong strategic move is the decision to enter the digital advertising business. A few weeks ago, the company The hiring was announced Uber (Uber) former advertising executive to run the digital advertising business line, a move that makes sense since it will be handled by PayPal. Billions of transactions per quarterWith modern AI tools, there is a great possibility that this big data can be monetized by selling targeted advertising. Grand View ResearchThe digital advertising market is expected to register a double-digit CAGR through 2030. That said, PYPL has a huge market opportunity. Two of the world’s largest digital advertising companies, Google (Google) and Meta (Meta) suggests the industry is regaining momentum after an uncertain 2022-2023.
KBV Research It suggests that digital advertising could be a trillion-dollar industry by 2030. This means that capturing just 1 percent of this pie would add $10 billion to PYPL’s annual revenue by 2030, a robust figure compared to the company’s TTM revenue of $30 billion. Bottom line, there’s significant potential to drive revenue growth from this new venture.
Q1 2024 10Q Report
While the company released its earnings over a month ago, any fundamental analysis would be incomplete without an updated earnings review. Additionally, PayPal’s financial performance was strong in the first quarter, which is another positive sign for investors.
Revenue increased 9% year over year, primarily due to higher transaction revenue. The number of payment transactions per active account increased 13%, indicating that the slight decrease in active accounts did not have a significant impact on sales.
Management’s tight control over costs is evident as profitability outpaces revenue growth. Operating income increased 17% year over year, significantly outpacing revenue. This led to non-GAAP EPS increasing 27% year over year.
In summary, I am pleased with the company’s performance under new management. The first quarter results are a good indication of the focus on higher quality revenue growth and spending discipline. Management is committed to innovating and improving the customer experience, as evidenced by recent initiatives. I see great potential in the new digital advertising business line, which I believe has the potential to become a $10 billion business over the long term.
Evaluation Analysis
The last time we modeled PYPL’s discounted cash flows (“DCF”), we arrived at a fair share price of $80. Because DCF assumptions are fluid, models need to be updated periodically.
With no material changes in the financial environment, we maintain the WACC at 11.5%. Since March, consensus revenue forecasts for FY2024 have been revised downwards significantly. Our previous DCF model had FY2024 revenue of $34.4 billion, which has now been revised downward to $32.0 billion. We incorporate this change as well as updated revenue growth forecasts for 2025-2028. Given all opportunities and growth initiatives, high single-digit growth looks healthy for PayPal. Meanwhile, management’s cost efficiency initiatives have driven TTM FCF margins to grow from 17.19% to $1.28 billion. 21.37%This improvement is also factored into my DCF model, along with the expectation that PYPL can grow its FCF by at least 50 basis points per year. According to Seeking Alpha, PYPL has 1.05 billion shares outstanding, with a constant growth rate of 3%, which is in line with the current rate of inflation.
Author’s calculations
My latest fair value price estimate is $74, $6 lower than my previous target due to more conservative base year earnings assumptions, while the 17% upside potential remains attractive.
PayPal’s current P/E ratio is 12.5, which is very low for a growth company. FY2024 is a “transition year” and EPS is expected to decline; however, consensus forecasts expect a solid recovery in EPS from 2025 to 2027. Looking at PYPL’s current P/E ratio and future P/E ratio, we believe the stock is undervalued.
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In summary, PYPL’s valuation is attractive from both a DCF perspective and a P/E ratio perspective, and although I have lowered my target price from $80 to $74, there is still plenty of upside potential of 17%.
Mitigating Factors
PayPal’s innovation and expansion into new fields looks promising. On the other hand, there is always a significant amount of uncertainty and execution risk when a company embarks on a new project. Innovation may require a larger budget than expected, and the benefits of introducing new features may be lower than the costs. The field of electronic payments is changing rapidly, with strong entrants such as Apple and Google making significant inroads in the industry in recent years. Speed of innovation is crucial, as technology can become outdated in today’s fast-paced world.
The company’s performance is highly dependent on total payment volume. If TPV declines, PayPal’s transaction-based revenue will move in the same direction. TPV is highly dependent on the health of the overall economy. Even though the US economy has shown unexpected resilience, it is important to remember that monetary policy is tight and the Fed is not yet ready to start cutting interest rates. If monetary policy remains this tight over the next few years, the economy may experience a recession, which will certainly have a negative impact on TPV.
Conclusion
Despite the price target reduction, I remain very bullish. The upside potential remains attractive. Positive fundamentals increase the likelihood of sustained growth that could bring the stock closer to fair value. Therefore, I still consider PYPL a “Strong Buy.”
