What we think about PayPal (PYPL)
PayPal in Three Words: Two-sided payments network
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Background
PayPal operates a global two-sided payments network at massive scale, with over 430 million active accounts across 200+ markets. In 2023 alone, PayPal processed over 24 billion transactions amounting to $1.5 trillion in total payment volume. The platform offers flexibility for consumers to fund payments from various sources (bank accounts, PayPal/Venmo balances, cards, crypto) and use installment plans. PayPal also enables safer money transfers. For merchants, PayPal provides an end-to-end solution for processing transactions and expanding reach into cross-border markets.
PayPal primarily makes money by charging fees based on payment transaction volume processed on its platforms. Additional revenue comes from foreign currency conversion fees, instant transfer fees, cryptocurrency fees, credit fees, subscriptions, and payment gateway services. In summary, PayPal operates a global, high-volume payments network facilitating transactions between consumers and merchants, generating revenue through transaction fees and value-added services.
PayPal is facing some challenges but also has major opportunities ahead.
On the challenge front, PayPal has seen transaction margins come under pressure lately. This is because growth in Braintree, its lower-margin unbranded processing business, now accounts for a third of total payment volume. With branded PayPal checkout growth lagging, overall margins per transaction have declined. To offset this, PayPal has tightly managed non-transaction operating costs, allowing free cash flow to remain strong at around $5 billion annually. But there is a limit to how much costs can be cut without impacting long-term prospects.
However, newly appointed CEO Alex Chriss has outlined a three-pronged strategy to reinvigorate growth and establish PayPal as a payments platform. First is reinventing the consumer checkout experience to clearly demonstrate PayPal’s value. Second is improving and aggressively scaling PayPal Complete Payments globally for SMBs. Third is expanding services and driving margin expansion for Braintree enterprise customers.
On the Braintree front, PayPal is already processing $450 billion for enterprises in a $5 trillion market. Opportunity lies in offering additional services like payouts and FX on top of payments processing. The PayPal Complete Payments product also allows PayPal to target higher-margin SMB payments – a $750 billion total addressable market historically untouched. With Chriss’ SMB experience from Intuit, PayPal is well positioned here.
In essence, while PayPal faces some margin pressures currently, its opportunities in consumer payments, SMB, and B2B payments are vast. Platform capabilities and improved execution under new leadership can unlock this potential over time. But better aligned resources and consistent execution remain key.
Overall, this isn’t a slam dunk in any way but PayPal’s market valuation remains undemanding. For the patient investor, PayPal represents favorable reward versus risk tradeoffs.
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