IS PAYPAL A GOOD INVESTMENT?
Is PayPal a good investment? What is PayPal’s fair value / Intrinsic value? Is PayPal a buy at current valuations? We are trying to find out these questions in the following fundamental analysis.
The data used in the below analysis and discounted cash flow model comes from a combination of SharePad, Finbox, and the PayPal Investor Relations website. Additionally, the dcf model uses personal assumptions, which are shared below.
Table of Contents
PayPal Company Overview
PayPal Fundamental Analysis
PayPal Valuation Review
- Analysts Targets
- Comparable Analysis
- PayPal Valuation Multiples
- PayPal DCF – Base Case – Assumptions & FCF
- DCF – EBITDA Exit – Valuation & IRR
- DCF – EBITDA Exit – Sensitivity Analysis
- DCF – Perpetual Growth Rate – Valuation & IRR
- DCF – Perpetual Growth Rate – Sensitivity Analysis
- PayPal DCF – Scenario Anlaysis
- PayPal DCF – Bear Case
- PayPal DCF – Bull Case
Valuation Summary
PayPal Company Overview
PayPal Introduction
PayPal Company Description
PayPal Holdings, Inc. operates a technology platform that enables digital payments on behalf of merchants and consumers worldwide. It provides payment solutions under the PayPal, PayPal Credit, Braintree, Venmo, Xoom, Zettle, Hyperwallet, Honey, and Paidy names.
The company’s payments platform allows consumers to send and receive payments in approximately 200 markets and in approximately 100 currencies, withdraw funds to their bank accounts in 56 currencies, and hold balances in their PayPal accounts in 25 currencies.
PayPal Holdings, Inc. was founded in 1998 and is headquartered in San Jose, California.
PayPal Fundamentals
| Current Share Price (m) | $115.29 | Revenue (m) | $25,371 |
| Shares Outstanding | 1,168 | EBITDA (m) | $5,589 |
| Market Cap (m) | $134,659 | EBITDA Margin | 22% |
| Cash (m) | $9,048 | EV/EBITDA | 24x |
| Total Debt (m) | $9,500 | Debt / EBITDA | 1.62x |
| Enterprise Value (m) | $134,207 | P/E | 29.8 |
PayPal Revenue Breakdown – Region
| Region | Revenue (m) | % |
|---|---|---|
| United States | $13,712 | 54.0% |
| Other Countries | $9,319 | 36.7% |
| United Kingdom | $2,340 | 9.2% |
PayPal Revenue Breakdown – Product
| Product | Revenue (m) | % |
|---|---|---|
| Transaction Revenues | $23,402 | 92.2% |
| Revenue from other services | $1,969 | 7.8% |
PayPal Share Price History
| Current Price: | 384.39 | 52 WK Low: | 359.70 | 52 WK High: | 691.69 |
PayPal Shareholder Ownership
| Shareholder | Holding ($m) | % |
|---|---|---|
| Vanguard Group Inc | 90.6 | 7.8% |
| BlackRock Inc | 82.4 | 7.1% |
| FMR LLC | 45.5 | 3.9% |
| State Street Corporation | 45.2 | 3.8% |
| FMR Inc | 44.4 | 3.8% |
| Fidelity Management & Research Company LLC | 35.1 | 3.0% |
| Vanguard Investments Australia Ltd | 34.0 | 2.9% |
| Comprehensive Financial Management LLC | 31.3 | 2.7% |
| Capital World Investors | 27.6 | 2.4% |
| T. Rowe Price Associates Inc. | 27.5 | 2.3% |
| BlackRock Fund Advisors | 24.0 | 2.1% |
| Geode Capital Management LLC | 18.9 | 1.6% |
| Capital Research and Management Company | 18.3 | 1.6% |
| Invesco Capital Management LLC | 17.9 | 1.5% |
| Capital Group | 16.0 | 1.4% |
| Northern Trust Corp | 13.1 | 1.1% |
| JPMorgan Chase & Co | 13.1 | 1.1% |
| SPDR State Street Global Advisors | 12.5 | 1.1% |
| Fundsmith LLP | 12.3 | 1.0% |
| State Street Global Advisors (Aus) Ltd | 12.0 | 1.0% |
| Edgewood Management LLC | 12.0 | 1.0% |
| Fisher Asset Management LLC | 12.0 | 1.0% |
| Others | 523.3 | 44.8% |
PayPal Fundamental Analysis
PayPal Income Statement
PayPal Income Statement Waterfall – 2021
Revenue of $25,371 million up from $21,454 million in 2020. Cost of sales includes transaction expenses. Operating expenses include usual operating expenses, plus technology development, customer support and restructuring charges.
5 Year View
Revenue is growing year on year. EBITDA at 22%, slightly up in last few years but down vs 2017. Net income margin at 16.4%, up over the 5-year period, but down from 19.4% in 2020.
PayPal Year Income Statement
| 2017A | 2018A | 2019A | 2020A | 2021A | |
|---|---|---|---|---|---|
| Sales Revenue | 13,094 | 15,451 | 17,772 | 21,454 | 25,371 |
| Cost of Sales | -5,430 | -6,855 | -8,170 | -9,675 | -11,375 |
| Gross Profit | 7,664 | 8,596 | 9,602 | 11,779 | 13,996 |
| Operating Expenses | -5,405 | -6,093 | -6,812 | -8,351 | -9,672 |
| Operating Income | 2,259 | 2,503 | 2,790 | 3,428 | 4,324 |
| Other Income, net | -137 | -218 | 126 | 1,758 | -50 |
| Interest, net | 78 | 91 | 82 | -121 | -175 |
| Income Before Taxes | 2,200 | 2,376 | 2,998 | 5,065 | 4,099 |
| Income Taxes | -405 | -319 | -539 | -863 | 70 |
| Net Income | 1,795 | 2,057 | 2,459 | 4,202 | 4,169 |
| EBITDA | 3,064 | 3,279 | 3,702 | 4,617 | 5,589 |
PayPal Growth
Growth down on all measures verses 2020 and verses 2017, particularly net income, which declined due to higher cost of sales.
PayPal Balance Sheet
PayPal Assets – Fiscal Year End 2021
Other current assets are predominantly funds receivable and customer accounts. Funds receivable are transactions pending clearance between external payment networks. Goodwill & Intangibles increased due to 5 acquisitions in 2021, with Paidy being the largest. It also included the Honey Science acquisition in 2020.
PayPal Liabilities – Fiscal Year End 2021
Like other current assets, other current liabilities are predominantly funds payable. Again this is the delay in clearing transactions between external payment networks. Long term debt of $8,049 million is down from $8,939 million in 2020.
PayPal Equity – Fiscal Year End 2021
PayPal Balance Sheet – 5 Year View
PayPal Cash Flow Statement
PayPal Cash Flow From Operations – Fiscal Year End 2021
Other operating activities include stock-based compensation and provisions for transaction and credit losses.
PayPal Cash From Financing – Fiscal Year End 2021
$3,373 million share buyback vs $162 million issuances and $361 million debt repaid vs $272 million debt issued. Other financial activities include funds payable and amounts due to customers, and tax withholding.
PayPal Cash From Investing – Fiscal Year End 2021
Other investing activities include $39,698 million of maturities and sales of investments, offset by $40,116 million of new purchases of investments. It also includes $2,763 million of acquisitions, plus some other smaller line items.
PayPal Cash Flow Statement – 5 Year View
The cash balance at the end of 2021 was only slightly below the end of 2020, dropping from $18,040 million to $18,029 million.
PayPal Valuation Review
Analysts View of PayPal
PayPal Price Target – Analysts’ Price Targets
| Analyst Name | Firm | Position | Price Target | Action |
|---|---|---|---|---|
| Dan Dolev | Mizuho Securities | Buy | 175.00 | Reiterated |
| Jason Kupferberg | Bank of America Securities | Buy | 175.00 | Reiterated |
| Ramsey El Assal | Barclays | Buy | 200.00 | Maintained |
| Werner Eisenmann | DZ BANK AG | Hold | 140.00 | Downgraded |
| Harshita Rawat | Bernstein | Hold | 140.00 | Maintained |
| Hal Goetsch | Loop Capital Markets | Buy | 212.00 | Maintained |
| James Fotheringham | BMO Capital | Buy | 180.00 | Maintained |
| Joseph Vafi | Canaccord Genuity | Buy | 215.00 | Maintained |
| Josh Beck | KeyBanc | Buy | 200.00 | Maintained |
| James Faucette | Morgan Stanley | Buy | 190.00 | Maintained |
| Mayank Tandon | Needham | Hold | Maintained | |
| Daniel Perlin | RBC Capital | Buy | 180.00 | Maintained |
| Andrew Jeffrey | Truist Financial | Hold | 130.00 | Maintained |
| Darrin Peller | Wolfe Research | Buy | 160.00 | Maintained |
| Georgios Mihalos | Cowen & Co. | Buy | 147.00 | Maintained |
| Moshe Katri | Wedbush | Buy | 170.00 | Maintained |
| Mark Palmer | BTIG | Hold | Downgraded | |
| Bryan Keane | Deutsche Bank | Buy | 200.00 | Reiterated |
| David Scharf | JMP Securities | Buy | 198.00 | Maintained |
| Tien Tsin Huang | J.P. Morgan | Buy | 190.00 | Maintained |
| Tammy Qiu | Berenberg Bank | Buy | 190.00 | Maintained |
| James Friedman | Susquehanna | Buy | 220.00 | Maintained |
| Lisa Elis | MoffettNathanson | Buy | 190.00 | Maintained |
| Timothy Chiodo | Credit Suisse | Buy | 190.00 | Maintained |
| John Davis | Raymond James | Hold | Downgraded | |
| Chris Brendler | D.A. Davidson | Buy | Maintained | |
| Christopher Donat | Piper Sandler | Buy | 185.00 | Maintained |
| David Togut | Evercore ISI | Buy | 245.00 | Maintained |
| Kunaal Malde | Atlantic Equities | Buy | 180.00 | Maintained |
| Rayna Kumar | UBS | Buy | 218.00 | Maintained |
| Andrew Bauch | SMBC Nikko | Sell | 125.00 | Maintained |
| Sean Horgan | Rosenblatt Securities | Buy | 216.00 | Maintained |
| Trevor Williams | Jefferies | Hold | 145.00 | Maintained |
| Martin Marandon-Carlhian | Oddo BHF | Hold | 200.00 | Downgraded |
| Colin Sebastian | Robert W. Baird | Buy | 205.00 | Maintained |
| Ashwin Shirvaikar | Citigroup | Buy | 235.00 | Maintained |
| Alexandre Faure | BNP Paribas | Hold | 200.00 | Downgraded |
| Dominick Gabriele | Oppenheimer | Buy | 268.00 | Maintained |
| Hans Engel | Erste Group | Hold | Downgraded | |
| Timothy Willi | Wells Fargo | Buy | Maintained | |
| Michael Del Grosso | Compass Point | Buy | 290.00 | Maintained |
| Unknown Analyst | Redburn Partners | Buy | Initiated Coverage |
74% of analysis rate Paypal as a buy, with only 2% rating as a sell. However, 15% have downgraded their view with no analyst upgrading. The analysts’ price targets range from £125 to $290, all of which are above the current market price.
Analysts’ Consensus – Is PayPal a Buy?
Analysts Recent Actions for PayPal Stock
PayPal Comparable Analysis
Caution should be taken as no two companies are precisely the same. Companies can be at different stages of maturity, have different operating segments, operate in different geographical regions etc. Best efforts have been made to use similar companies in the below analysis.
PayPal Comps Analysis
When comparing valuation multiples with other companies in the finance sector similar to PayPal, we can determine average multiples to calculate the value of PayPal.
Using year-end 2021 financials and the average valuation multiples, we get a valuation range between $90.75 and $172.12.
Using these identical average multiples but with the 5-year forecasted financials, we get a 5-year price range of $166 to $377. (These figures have not been discounted back to present value.)
Comps Analysis Valuations
Companies used in determining the comp values are as follows:
PayPal Holdings, Capital One Financial Corp, Discover Financial Services, GreenBox Pos, International Money Express, PagSeguro Digital Ltd, Visa Inc and Wise Plc.
Outliers have been removed, and not all companies were included in every multiple calculation due to negative cash flows or unavailable data sources.
PayPal Valuation Multiples Historical vs Current
PayPal EV/EBITDA
PayPal’s EV/EBITDA multiples at 22.5 are lower than the 2,3,5,7 & 10-year averages. The EV/EBITDA was lower in 2015 and 2016 at 19.8 and 19.5. PayPal’s EV/EBITDA peaked in 2020 at 59.4, followed by 32 in 2019.
PayPal EV/Sales
PayPal’s EV/Sales is also lower than the 2,3,5,7 & 10-year averages with an EV/Sales of 5. Again only 2015 and 2016 were lower at 4.6 & 4.2. PayPal’s EV/Sales peaked in 2020 at 13, followed by 7.2 in 2019.
Paypal P/E – Price/Earnings Multiple
P/E – Price to Earnings of 29.8 follows the same pattern as EV/EBITDA and EV/Sales, the lowest in 5 years. 2015 and 2016 were lower at 28.1 & 26.3. 2020 was the peak at a vast 101.9, followed by 2019 at 54.8.
PayPal P/S – Price/Sales Multiple
P/S – Price to Sales or Price to Revenue again follows the same pattern, although the current multiple is closer to the 2015 & 2016 multiples, 4.6 & 4.2. Again 2020 was the peak at 13.
PayPal P/FCF – Price/Free Cash Flow
P/FCF – Price to Free Cash Flow has a slightly different pattern. It is still lower than previous averages, and 2020 peaked at 55.7. However, the current multiple of 23 is lower than in 2015 at 24.4.
PayPal DCF – Assumptions & Base Case FCF
PayPal DCF Assumptions
| Tax Rate | 18.0% |
| Discount Rate | 6.8% |
| Perpetual Growth Rate | 2.0% |
| EV/EBITDA Multiple | 15.0x |
| Transaction Date | 12/02/2022 |
| Fiscal Year-End | 31/12/2022 |
| Current Price | $115.29 |
| Shares Outstanding | 1,168 |
| Debt (m) | $9,048 |
| Cash (m) | $9,500 |
| Capex (m) | $908 |
In addition to the above assumptions, the below DCF model is based on our base case scenario, which assumes a 17% annual revenue growth rate over the next 5-years. Analysts average forecasts at 17.6%; therefore, our base is slightly more conservative. The comparisons between our bear case, base case & bull case scenarios are detailed below.
PayPal Cash Flow Forecast – Base Case DCF Model
Using the above assumptions and base case scenario, the PayPal discounted cash flow model shows a slight reduction in free cash flow for 2022 of $4,685 million, then growth to $8,733 million in 2026.
PayPal DCF – EBITDA Exit – Valuation & IRR
PayPal Terminal Value – EBITDA Exit
| Final Forecast EBITDA (m) | $12,335 |
| EV/EBITDA Multiple | 15x |
| TERMINAL VALUE (m) | $185,021 |
PayPal Intrinsic Value – EBITDA Exit
| Enterprise Value (m) | $158,402 |
| Plus: Cash (m) | $9,500 |
| Less: Debt (m) | $9,048 |
| Equity Value (m) | $158,854 |
| EQUITY VALUE / SHARE | $136.00 |
PayPal Market Value vs Intrinsic Value – EBITDA Exit
Based on the model assumptions and using the EBITDA exit multiple of 15, the intrinsic value for PayPal is $136. This means there is a potential upside of $21.
| Market Value | $115.29 |
| Upside | $20.71 |
| Intrinsic Value | $136.00 |
PayPal Investment – Internal Rate of Return (IRR)
| Target Price Upside | 18% |
| Internal Rate of Return (IRR) | 10.7% |
PayPal Internal Rate of Return (IRR) vs Purchase Price
Based on the model assumptions and the current market share price of $115.29, there is an internal rate of return of 10.7%. If the stock price dropped 20% to $92, the IRR would be 16.3%.
PayPal DCF – EBITDA Exit – Sensitivity Analysis
Variables Influence on Model
Changes to the revenue have the most significant impact on this model by a considerable margin. You can also see that a positive shift in revenue has a more substantial impact on the model. Next, changes to the cost of sales have the most significant impact, followed by the EV/EBITDA multiple and the discount rate.
The intrinsic value calculated from the model uses the assumptions: EBITDA Exit Multiple of 15x, WACC of 6.8% and final forecast EBITDA of $12,335. The tables below show the intrinsic value based on different assumption scenarios.
Impact on Intrinsic Value Price Per Share
When reviewing different EV/EBITDA multiples with different final forecasted EBITDA results, we see that the lowest value per share is $108. This is based on an EV/EBITDA exit multiple of 12.0x and a final EBITDA figure of $11,718 million, which is -5% of the base case forecast. The highest value per share is $166, based on an EV/EBITDA exit multiple of 18.0x and a financial EBITDA figure of $12,951 million, which is +5% of the base case forecast.
When reviewing different discount factors (WACC) with different final forecasted EBITDA results, we can see the lowest value per share is $125. This is based on a discount factor of 7.8% and a final EBITDA figure of $11,718 million, which is -5% of the base case forecast. The highest value per share is $148, based on a discount factor of 5.8% and a financial EBITDA figure of $12,951 million, which is +5% of the base case forecast.
PayPal DCF – Perpetual Growth Rate – Valuation & IRR
PayPal Terminal Value – Perpetual Growth
| Final Forecast FCFf (m) | $8,082 |
| Perpetual Growth Rate | 2.0% |
| TERMINAL VALUE (m) | $172,239 |
PayPal Intrinsic Value – Perpetual Growth
| Enterprise Value (m) | $149,127 |
| Plus: Cash (m) | $9,500 |
| Less: Debt (m) | $9,048 |
| Equity Value (m) | $149,579 |
| EQUITY VALUE / SHARE | $128.06 |
PayPal Market Value vs Intrinsic Value – Perpetual Growth
Based on the model assumptions using the perpetual growth rate, the intrinsic value is $128, which is $13 higher than the current market value.
| Market Value | $115.29 |
| Upside | $12.77 |
| Intrinsic Value | $128.06 |
PayPal Investment – Internal Rate of Return (IRR)
| Target Price Upside | 11% |
| Internal Rate of Return (IRR) | 9% |
PayPal Internal Rate of Return (IRR) vs Purchase Price
Based on the model assumptions and the current market share price of $115.29, there is an internal rate of return of 9%. If the stock price dropped 20% to $92, the IRR would be 14.8%.
PayPal DCF – Perpetual Growth Rate – Sensitivity Analysis
Variables’ Influence on Model
Changes to revenue have the most significant impact on this model, followed by changes to the cost of sales. A positive shift in revenue has a more substantial impact on the model than a negative change.
The perpetual growth rate shows less of an impact. However, this chart is based on relative % movements. Therefore, the perpetual growth rate could vary much larger than the other variables. For example, a change from 2% to 3% is a 50% increase, which you are less likely to see for the other variables. The discount rate has the most negligible impact on the model.
The model assumptions show a perpetual growth rate of 2%, WACC of 6.8% and a final forecast FCFf of $8,082. The tables below show the intrinsic value based on different assumption scenarios.
Impact on Intrinsic Value Per Share
When reviewing different perpetual growth rates with different final forecasted free cash flow results, we can see the lowest value per share is $114. This is based on a perpetual growth rate of 1.6% and a final free cash flow figure of $7,678 million, which is -5% of the base case forecast. The highest value per share is $151, based on a perpetual growth rate of 2.6% and a financial free cash flow figure of $8,486 million, which is +5% of the base case forecast.
When reviewing different discount factors with different final forecasted free cash flow results, we can see the lowest value per share is $100. this is based on a discount factor of 7.8% and a final free cash flow figure of $7,678 million, which is -5% of the base case forecast. The highest value per share is $170, based on a discount factor of 5.8% and a financial free cash flow figure of $8,486 million, which is +5% of the base case forecast.
PayPal Discounted Cash Flow Model – Scenario Analysis
The above DCF models were based on the base case scenario of 17% annual revenue growth over the next five years. Below is a snapshot of the bear case and bull case scenarios.
PayPal DCF – Bear Case Scenario
PayPal Revenue Growth Forecast – Bear Case
We have set the revenue growth to decline for the bear case scenario, starting at 15% in 2022, which is the low end of the analysts’ forecasts. Revenue then declines by 1% a year for the next four years of the forecast.
PayPal Bear Case Free Cash Flow Forecast
Bear case free cash flow forecast starts at $4,588 million in 2022 and grows to $7,249 million in 2026.
PayPal Bear Case Market Value vs Intrinsic Value
The current market value is $115.29. For the bull case scenario, using the EBITDA exit multiple for terminal value, the intrinsic value is $115.93. Therefore, only $0.64 higher than the current market value. If we use the perpetual growth rate for the terminal value, the intrinsic value is $110.41, which is $4.88 lower than the current market value of $115.29.
PayPal DCF – Bull Case Scenario
PayPal Revenue Growth Forecast – Bull Case
We have set the revenue growth rate at 20% annually for the next five years for the bull case scenario. This is the top end of analysts’ forecasts.
PayPal Bull Case Free Cash Flow Forecast
The bull case free cash flow forecast starts at $4,658 million for 2022 and grows to $8,733 million in 2026.
PayPal Bull Case Market Value vs Intrinsic Value
The current market value is $115.29. For the bear case scenario, using the EBITDA exit multiple for terminal value, the intrinsic value is $158.83. Therefore, $43.54 higher than the current market value. If we use the perpetual growth rate for the terminal value, the intrinsic value is $166.62, which is $51.33 higher than the current market value of $115.29.
PayPal Valuation Summary
PayPal Value Valuation Football Field Chart
Is PayPal a good investment?
Is PayPal a buy at current valuations?
PayPal is currently trading at the bottom end of its 52-week trading range. All analysts’ forecasts are above the current market value, with the highest forecasts being more than double the current value. The comparable analysis and the average multiples show that the current value is in the mid-range of the valuations.
Looking at the DCF models, the current market value is at the top end of the bear case scenario. The base case scenario is slightly above current values, ranging from £128 to $126. The bull case scenario leaves more margin of safety with a range from $159 to $167.
Based on this analysis, PayPal could potentially be a good investment if it can maintain annual growth at 17% or above. Conversely, if PayPal’s growth starts to decline, it will significantly impact potential future returns.
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Disclosure
I/we have open long positions in PayPal. We may increase this position depending on market movements over the coming weeks.
This analysis has been written by a Bull Headed Bear analyst/author for Bull-Headed-Bear.com. I/we receive no compensation for this post other than any payments received from ads or affiliate links.