Talking Stocks: PayPal Holdings Inc.
Updated: Feb 8, 2020
Everyone knows PayPal. It was the catalyst of Elon Musk’s wealth; a leader in the Fin-tech era through its innovative approach of promoting cashless endeavors and providing a new spin on convenience to the everyday consumer.
Currently, they transfer funds for over 280 million customers on an annual basis, and this number consistently grows each year as a result of a greater consumer shift to electronic payments as well as generally impressive earnings.
How the business works:
The company's business model is fee-based, as they charge a small percentage for every payment and therefore gain themselves a portion of each transaction. This is particularly effective with regard to consistent revenue streams, because the company will be able to gain cash inflows with every purchase or transfer occurring within their system. They leverage the large scale of their worldwide operations to successfully generate revenues within the billion-dollar bracket each fiscal year: an aspect that has caused expedited growth levels in their stock price in recent years.
If their monetary dominance isn't enough to convince you, here are three points that may alter your perspective as to why PayPal is currently a BUY:
The FinTech giant’s revenue estimates for the second financial quarter of 2019 were quite significantly missed, causing a panic sell-off and therefore resulting in the plummeting of the stock price from $121 to $103. Almost a 20% drop: a mini catastrophe that screams financial opportunity to me.
Despite marginally missing revenue estimates by 0.2 billion USD ($4.31B actual vs $4.33B estimated), PayPal’s financials are extremely reliable, which is exactly why this stock is still a great BUY. More specifically, we can consider:
a) Earnings Per Share (EPS) Growth
While PayPal’s net profitability is significantly impressive, it’s still slightly below the industry average: standing at 15.27% whilst the latter supersedes with 21.4%. However, when you alter your viewpoint and compare the financial growth of the company in solely the last year, the results might be exceedingly attractive.
Figure 1: Excerpt from PayPal Holding's Financials (Company on the left; Industry Average on the right)
*TTM: Trailing Twelve Months
Feast-eth your eyes upon that holy potential of exponential growth. While the average industry Earnings Per Share (EPS) has only augmented a mere 4.58%, PayPal has skyrocketed its operations and revenues to bring in an almost 50% increase in EPS in a single year. This should be the first step in showing you that the company is capable and certainly has the ambition to create an even stronger presence in the FinTech market.
b) Available Capital
If you look at PayPal’s balance sheet, their cash reserves have been significantly ameliorating every financial quarter. Strong cash reserves suggest that the company contains the ability to fund further R&D and the growth of operations, which is another reason why we can almost certainly imply that their stock price drop is simply an overreaction from panicked investors, and that good times lie ahead for those who hold their BUY positions or open a trade NOW.
Figure 2: Excerpt from PayPal Holdings’ Balance Sheet:
Specifically referring to the “Cash Only section”, PayPal’s performance has been exceptionally positive by asserting significant growth levels over the last 5 fiscal years. While their increasing billion dollar funds depict positivity in terms of potential investment into the company’s future, it also implies that investor confidence is high.
The special thing about investor confidence is that it’s truly a virus, but a virus of the greatest kind. One public declaration from a well-known, wealthy businessman or woman will send a frenzy of investors your way, which is precisely what happened with PayPal.
In 2014, billionaire Carl Icahn used his platform to concretely suggest that PayPal would be able to achieve significant growth rates and worldwide dominance in the e-payments market if they split from eBay (their owner at the time) and officially become a Publicly Traded Company again. Due to this particular form of public activism, investors strongly desired PayPal stock and thus caused the company’s market value to reach $49 billion on its first trading day.
Therefore, the fact that PayPal Holdings possess formidable cash reserves whilst simultaneously retaining high investor confidence suggests the idea that the future is extremely bright for this company, provided that competitors do not supersede PayPal in terms of more convenient payment processing systems.
2. Market Growth Potential
The ever-growing FinTech market is set to sustain consistent growth levels year-on-year, especially in the Middle East and Africa (MEA) region.
In 2015, there were only 559 FinTech companies operating in the MEA market, and this statistic is on the trajectory to become 1,845 companies by 2022. The number of financial technology firms in the MEA region will more than triple within 7 years, which clearly speaks to the assertion that this market certainly has substantial potential to grow.
For PayPal Holdings, this acts as a one-way ticket towards greater business opportunity and therefore, greater profits.
Figure 3: Forecasted growth levels for FinTech companies in the MEA region:
Because of this forecasted growth, PayPal stand to attain a myriad of opportunities to penetrate these growing regions by either acquiring up-and-coming start-ups, or by partnering with local banks and retailers as a payment processor: both of which will facilitate even higher investor confidence and profitability levels in the near future.
3. Leadership Guidance
PayPal’s leadership is filled with highly-educated, driven and experienced individuals who possess the ability to successfully project the FinTech company to even further success.
For starters, PayPal’s Senior Vice President and Chief of Strategy and Growth, Jonathan Auerbach has had over 25 years of experience in managing technology companies, and therefore brings a sense of confidence as well as guidance when it comes to avoiding critical mistakes and implementing optimal strategies: both of which are substantial in order for PayPal to avoid inhibiting their continuous growth.
In addition, the leadership team (including CEO Dan Schulman, Auerbach and 9 others) in its entirety own over $100 million of PayPal stock as of August 16th 2019: a fact that clearly suggests they possess a profound financial motive to ensure that their commitment to the growth of the company is 110% on a daily basis.
In my personal opinion, looking at the leader’s stake in their own company is a critical indicator of how much potential the company could attain. If the leadership team do not hold relatively high stakes in their business, it is likely that their performance will not be as driven and ambitious compared to a business where the leadership team hold highly valued stock positions, and rightly so! If the leaders individually hold over $10 or $20 million in their company stock, why wouldn’t they ensure that they are unconditionally committed to growing both the company and the value of their positions?
Based on the data included above as well as the implications from it, it’s clear that PayPal Holdings are on an impenetrable trajectory towards continuous organizational growth and FinTech dominance.
While there is a growing number of financial technology companies across the globe, PayPal’s current growth in earnings as well as their rising opportunities in the FinTech market suggest that they will be able to maintain their dominance for the foreseeable future, and therefore ensure that holding a stock position in this company is bound to greatly benefit shareholders within the next few fiscal quarters.