PayPal: Why I Sold All My Shares (Rating Downgrade)

seekingalpha04-26

PayPal stock has cratered more than 80% since its peak in 2021 amidst a declining user base and slowing revenue growth.Stiff competition and challenges presented by Venmo and Braintree are pressuring ...

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DreamZ85
04-26
DreamZ85
I glad u sold off your PayPal stock and purchase meta which dropped 15% it seem like every single stock u say goes up will go down just like the one for SEA

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ACC","LU0354030511.USD":"ALLSPRING  U.S. LARGE CAP GROWTH \"I\" (USD) ACC"},"translate_title":"PayPal：为什么我卖掉了我所有的股票（评级下调）","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"WU":1,"GPN":1,"EBAY":1,"ADYYF":1,"MA":1,"META":1,"PYPL":1,"SQ":1,"V":1,"LU":0.6},"content_text":"PayPal stock has cratered more than 80% since its peak in 2021 amidst a declining user base and slowing revenue growth.Stiff competition and challenges presented by Venmo and Braintree are pressuring PayPal's pricing power and transaction take rate.Analysts revised the 2024 EPS growth expectation to 0%, marking a \"transitory year\" and a lack of progress on the efficiency improvements.PayPal's stock is trading at a cheap valuation of 16.9x its earnings, but the lackluster top-line growth and no bottom-line growth will weigh on the stock in 2024.I have completely divested my stake in PayPal as I expect the stock to be dead money this year, instead rotating to better opportunities.   Tero VesalainenPayPal (NASDAQ:PYPL) stock has seen a wild ride in the last few years, with many investors losing faith in the stock ever recovering, given the 80% slump. If you bought the stock near its all-time high of $310, you would need the stock to rally at least 475% from today's price to recover most of your losses. After such a major destruction of value, PayPal is now trading at a relatively cheap valuation of 16.89x its earnings, compared to its historical valuation range of 30x earnings. PYPL Price (Seeking Alpha)The valuation indeed suggests the stock is cheap. That's why I have built a significant position during 2023 and written a bullish article, expecting a similar reversal as witnessed by Meta Platforms (META) given the \"year of efficiency\" was meant to bring material improvements to the company's bottom line with double-digit EPS growth. Yet, the recent revisions now point to flat 2024 EPS growth, hinting the efficiency progress is not materializing and the fierce competition may start eating PayPal's market share. Since the last coverage, the stock has delivered close to 7.5% ROI, similar to the market's performance, nonetheless, I have divested all my PayPal shares, rotating to what I consider, better opportunities. Let me show you the reasons why. Last Coverage (Seeking Alpha)PayPal's Growth Issues One of the key KPIs of pricey technology, or in PayPal's case fintech companies, is user growth. Some of us learned the hard way that slowing user growth generally signals troubles for growth stocks as this in return leads to fewer monetization opportunities in the future. PayPal's user growth since 2014 has grown at a mid double-digit rate, accelerating to over 20%, during the pandemic years as e-commerce and online transactions soared. The active users peaked in 2022 at 435 million and declined by 2.0% since. At the end of 2023, 426 million active users were using at least one of PayPal's services. PayPal's executives set the target to reach 750 million users by 2025, basically doubling the user base from 2020, but we know now that this is not achievable and the company has dialed down on its expectations, spooking investors especially as the growth of its higher-margin checkout business is being pressured most. PayPal is no longer \"cool\" among younger consumers with 50% of its users being 45 or older. Instead, the younger generation is rotating toward the \"BNPL,\" or buy now, pay later option, dominated by the Swedish company Klarna. The impact of the new CEO, Alex Chriss, on the generational problem is yet to be seen, but it's a key issue to address for PayPal to remain competitive.        Year Users (b) YoY Change %   2013 143.0 0.0%   2014 161.0 12.6%   2015 179.0 11.2%   2016 197.0 10.1%   2017 227.0 15.2%   2018 267.0 17.6%   2019 305.0 14.2%   2020 377.0 23.6%   2021 426.0 13.0%   2022 435.0 2.1%   2023 426.0 -2.0%   Click to enlarge If we look at the quarterly development instead, PayPal's user base is seeing its first-ever decline which started in Q3 2023 and has accelerated since. PayPal will report its Q1 earnings on April 30. This is the key metric to watch as the stock may react negatively if the decline further accelerates. Quarterly User Growth (Statista)Alongside the strong historical user growth, PayPal's revenue has skyrocketed from less than $7B back in 2013 to more than $29.7B in 2023 as the company successfully monetized its user base and benefited heavily from the key partnership with eBay (EBAY) as a main payment system. Given the strong correlation between user growth and revenue, the pandemic years witnessed the fastest growth, followed by roughly 8.5% annual revenue growth since 2022. More than the next three years, analysts are expecting a slight contraction of top-line growth toward 7.7%.        Year Revenue ($b) YoY Change   2013 6.7 -   2014 8.0 19.4%   2015 9.2 15.0%   2016 10.8 17.4%   2017 13.0 20.4%   2018 15.4 18.5%   2019 17.7 14.9%   2020 21.4 20.9%   2021 25.3 18.2%   2022 27.5 8.7%   2023 29.7 8.0%   Click to enlarge With the fierce competition in the fintech industry, growing user base and top-line might prove difficult in the mid term, so instead PayPal's hopes lay on the improvements of its bottom line. When I covered PayPal in January, the EPS expectations were to deliver 11% growth in 2024. However, analysts polled by S&P Global have revised their forecasts, now expecting 2024 to be a \"transitory year\" with no growth, which implies the stock is trading at a very high PEG ratio of 17. The one metric that remains healthy (at least at first sight) is the transactions. Similarly to the tables above, here we can observe a deceleration as well, but 2023 has proven to be a record year with over 25B transactions.        Year Transactions (b) YoY Change %   2013 3.2 0.0%   2014 3.9 21.9%   2015 4.9 25.6%   2016 6.7 36.7%   2017 7.6 13.4%   2018 9.9 30.3%   2019 12.4 25.3%   2020 15.4 24.2%   2021 19.3 25.3%   2022 22.3 15.5%   2023 25.0 12.1%   Click to enlarge PayPal remains the industry leader in the online payments space with more than 40% market share, followed by Stripe with 20.5% and Shopify Pay Installments with 13.8%. The online payment industry is a lucrative business with hefty fees, driving the fierce competition in the space, which ultimately leads to a race to the bottom with lower transaction take rates. As of 2023 PayPal's transaction take rate has hit its lowest level of 1.76%, compared to 2.89% in 2015 and continuous decline every year. The take rate is the actual revenue PayPal retains from each transaction after splitting fees with payment networks. The 60% drop within eight years directly reflects PayPal's deteriorating pricing power in the ever-more competitive field and its gradual loss of eBay's orders, now replaced by Adyen. As the product mix is changing, PayPal is now more relying on Venmo's payments and Braintree's payment services, both of which are lower-margin businesses struggling with monetization, further driving the take rate downwards.        Year Transaction Take Rate % YoY Change %   2015 2.89% -   2016 2.71% -6.2%   2017 2.52% -7.0%   2018 2.37% -6.0%   2019 2.26% -4.6%   2020 2.13% -5.8%   2021 1.88% -11.7%   2022 1.83% -2.7%   2023 1.76% -3.8%   Click to enlarge To put things into perspective, even though PayPal's branded checkout represents 29% of the total transaction volume, it generates 80% of the total company's revenue, remaining the primary cash cow of the business. In contrast, Venmo represents 18% of total volume but contributes only 4% to the total revenue, highlighting the monetization challenges. Valuation PayPal's stock is currently trading at a P/E valuation of 16.89x, which is well below the P/E of 31.57x it historically traded at since 2015. The EV/EBITDA has significantly contracted as well, currently at 9.35x. PYPL Valuation (Seeking Alpha)Between 2015 and 2023, the company managed to grow its EPS at a rate of 18.8% annually. Given the elevated competition in the fintech space, we should no longer expect similar growth going forward. The user base has already hit its peak and the top-line is projected to normalize over the next three years growing at a rate of 7.7%.   Revenue Expectations (Seeking Alpha)The lack of progress on the cost efficiency improvements, and monetization of Venmo and Braintree, led to a revision of expectations and the EPS growth significantly contracted since my previous coverage, with analysts now expecting 2024 to be a \"transitory year\" with 0% EPS growth and growth resumption being punished back to 2025 as follows:   2025: EPS of $5.71E, 12% YoY growth  2026: EPS of $6.10E, 7% YoY growth  As a company operating in a very competitive environment, with a relatively new CEO who has not yet proven himself, with a declining user base, and challenges in the monetization of its fastest-growing products, even the depressed valuation presents challenges. I'm no longer expecting any stock price recovery in 2024.         Company Ticker P/E EV/EBITDA   PayPal Holdings, Inc. - 16.89 9.35   Global Payments Inc. (GPN) 33.17 13.55   Block, Inc. (SQ) 3,570.50 53.50   Visa Inc. (V) 30.39 23.31   Mastercard Incorporated (MA) 38.83 29.18   Adyen N.V. (OTCPK:ADYYF) 53.49 33.79   The Western Union Company (WU) 7.89 3.80   Click to enlarge Compared to peers in the fintech and payments industry, PayPal is indeed among the cheapest, except for Western Union. But the lack of bottom-line growth will in my opinion weigh on the stock this year, leading to dead money for PayPal investors. Takeaway PayPal is navigating major challenges such as a falling user base, lackluster revenue growth, and contracting transaction take rate. The new CEO will have a challenging job in addressing the generational shift issue and attracting young users back to the platform. With the falling user base, revenue growth has slowed significantly, and over the next few years, in the face of fierce competition, the revenue from each transaction is expected to further contract. PayPal's branded checkout remains the core source of revenue for the company, and the faster-growing segments such as Venmo and Braintree are facing monetization issues. Even though the valuation looks attractive, 2024 is expected to be a transitory year with 0% EPS growth, hinting at the lack of progress in efficiency improvements. After 2023, when I built a major position in PayPal, I accepted the reality and divested my full stake, earning an ROI of around 10% and moving on to better opportunities.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[{"id":299261883265176,"gmtCreate":1714088210470,"gmtModify":1714088214342,"author":{"id":"3577569919471507","authorId":"3577569919471507","name":"DreamZ85","avatar":"https://static.tigerbbs.com/4f88a546cd1787f83e30c21f07ed2b3a","vip":1,"crmLevel":7,"crmLevelSwitch":0},"htmlText":"I glad u sold off your PayPal stock and purchase meta which dropped 15% it seem like every single stock u say goes up will go down just like the one for SEA&nbsp;","listText":"I glad u sold off your PayPal stock and purchase meta which dropped 15% it seem like every single stock u say goes up will go down just like the one for SEA&nbsp;","text":"I glad u sold off your PayPal stock and purchase meta which dropped 15% it seem like every single stock u say goes up will go down just like the one for SEA","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/299261883265176","repostId":2430145250,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430145250"}