PayPal's Triumph: Resilience, Returns and Undervaluation

A look at the company's triumphs, struggles and valuation

  • Total payment volume surges 11% to $377 billion with impressive $1.4 trillion processed, outpacing major rivals.
  • Despite active accounts dip, rising TPV underscores robust network effect and CEO's transaction focus.
  • With 79% of top retailers onboard, PayPal leads digital wallets, defended by 20-plus years at payment forefront.
  • Challenging shareholder returns, undervaluation hint at potential upside, presenting opportunities amidst challenges.
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With shares of PayPal Holdings Inc. (PYPL, Financial) plummeting by around 35% over the past year, investors may be wondering if there is any value to be found.


While the company's financial metrics highlight value creation and financial stability, its shareholder returns show a challenging performance trend over the past few years compared to the broader market index.

Second-quarter surge, user resilience and market dominance

The company's total payment volume in the second quarter increased by 11% year over year to $377 billion, having processed a staggering $1.4 trillion in volume. To put that into perspective, Visa Inc. (V, Financial), Mastercard Inc (MA, Financial) and American Express Co (AXP, Financial) processed payments totaling $3.2 trillion, $2.3 trillion and $427 billion.

Despite the drop in the number of active accounts (from 433 million in the first quarter of this year to 431 million in the most recent quarter), the TPV is still rising at a healthy rate, highlighting PayPal's strong network effect and resiliency. Additionally, Dan Schulman, the retiring CEO who Intuit's Alex Chriss will succeed, has strongly emphasized increasing the volume of transactions made by current users rather than solely concentrating on account growth.

With 79% of the top 1,500 retailers in North America and Europe allowing customers to use its platform for checkout, PayPal is the most extensively used digital wallet. Apple Inc.'s (AAPL, Financial) Apple Pay comes in second. This enormous lead is conceivable only because the business has been at the forefront of digital payments for more than 20 years and the conglomerate can defend its market share, despite the strong competition.



ROIC and FCF enhance investor value

PayPal's return on invested capital stands at 13.53%, indicating it efficiently utilizes its capital to generate returns over its weighted average cost of capital of 9.3%, suggesting shareholder value creation.

The leveraged free cash flow margin over the trailing 12 months is 11.75%, signifying the portion of revenue turned into free cash flow after deducting interest expenses. Additionally, this suggests PayPal is able to convert earnings into cash flow, highlighting its financial stability and sustainability.

Historically, the company's leveraged free cash flow displays a fluctuating pattern, alternating between rises and falls, reflecting a lack of stability in its cash generation after financial commitments. In contrast, PayPal's total debt has consistently climbed, escalating since at least 2016. This trend signifies heightened financial risk due to increased leverage.

Confidence and employee incentive enhancement through share buybacks

The recent approval of an additional 34.6 million shares by stockholders showcases a robust belief in the company's growth prospects.

This expanded authorization under the amended and restated 2015 Equity Incentive Award Plan signals management's intent to attract and retain top talent by offering competitive stock-based incentives.

Lastly, the incorporation of 2.6 million shares from the 2022 inducement plan into the 34.6 million shares further bolsters the company's focus on rewarding performance and aligning employee interests with shareholder value.

Shareholder returns: A rocky road amid market momentum

PayPal has delivered negative shareholder returns over the past few years. In the year-to-date period, its price return has witnessed a steep decline of 16.05%, indicating a struggling performance in the short term. This contrasts starkly with the S&P 500 Price Return, which has surged by 15.77% over the same period, underscoring a substantial performance gap between PayPal and the broader market index.

The long-term perspective of the past three years reveals a concerning trend for PayPal's price return, which has experienced a drastic decrease of 68.77%. In contrast, the S&P 500 price return demonstrated a more robust growth of 31.78% during this timeframe.

Turning to total returns, including price changes and dividends, the company's year-to-date total return mirrors its price return decline of 16.05%. Over the past year, its total return declined by around 40%, again indicating declining sentiment in the market. Over three years, the total return also reflects a steep drop of 68.77%, accentuating the longer-term difficulties the company has faced.

Comparing these figures to the S&P 500 total return, it is evident that PayPal has significantly underperformed. The index's total return stands at 16.96%, while its one-year total return reached 5.22%. Finally, over the past three years, the index's total return surged by 38.14%, highlighting its consistent outperformance in contrast to PayPal's struggles.


Source: Author’s compilation

Unlocking value

PayPal exhibits a compelling valuation profile when considering key metrics. Its forward enterprise value-to-sales ratio of 2.25 is notably lower than the sector median of 2.93, indicating an undervaluation of approximately 23.41%. However, the comparison against PayPal's five-year historical average of 7.06 reveals a substantial undervaluation of 68.19%, hinting at potential upside.

Moreover, the forward EV-to-Ebitda ratio, standing at 8.88, is below the sector median of 10.76, showcasing an undervaluation of 17.47%. When contrasted with PayPal's five-year historical average of 25.78, the undervaluation becomes more pronounced, further emphasizing the potential attractiveness of the current market price as an entry point.

Examining the forward price-to-cash flow, PayPal's ratio of 10.64 falls below the sector median of 11.20, implying a 5.01% undervaluation. Strikingly, with a five-year historical average of 26.83, the undervaluation becomes substantial, reaching 60.33%.

Finally, PayPal's current price of $60.46 is significantly lower than its GF Value of $142.11, indicating the stock may be undervalued. Similarly, the price-earnings ratio of 16.94 aligns with industry averages, but its price-sales ratio 2.34 remains higher than the industry average. Considering its returns in the last two years and its significant undervaluation, the stock is expected to outperform the market in the coming years.



Despite a decrease in active accounts, PayPal's robust network effect is evident. Dominance in digital wallets and impressive financial metrics bolster its market position. Even though shareholder returns have been challenging, contrasting market trends, metrics suggest significant undervaluation, hinting at potential upside.


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