$PayPal(PYPL)$ $ProShares UltraPro QQQ(TQQQ)$  $DJIA(.DJI)$ $NASDAQ(.IXIC)$  

Paypal (PYPL) is a technology platform that digital payments for consumers and businesses. PayPal operates a two-sided network connecting 426 million active consumer accounts and merchant accounts across more than 200 markets (as at FY23). PayPal derives more than 90% of its revenues from transaction fees with the remaining made up by value added services.

Investment Overview

Dominant player in e-commerce payments, poised to benefit from secular trends towards digital payments and e-commerce. Total active accounts and engagement levels have grown 2.4x and 2.1x from 2016 to 2023. PYPL's initiatives in cryptocurrency, BNPL, offline and instore strategies should further accelerate the engagement levels going forward. Together, the increase in engagement and scale will likely lead to higher average revenue per user and lower churn rates. The shift toward digital payments will also turbocharge total payment volume (TPV) which consensus expects to grow 11%/10%/10% in FY24F/FY25F/FY26F.

Barriers to scale remain a competitive advantage despite growing competition. PYPL operates a two-sided network connecting 392m consumer accounts to 35m merchant accounts. The intensifying competition from Square, Apple pay, and BNPL firms could present a threat to PYPL’s dominance. Although barriers to entry are declining in the fintech space, barriers to scale are still presently high. PYPL's digital wallet acceptance among the largest retailers in North America and Europe surpasses that of its competitors. Apple Pay has the second highest acceptance rate at 28%, far below PYPL's 79%. Offerings by other competitors have acceptance rates around or lower than the mid-teens level. Despite growing competition, the scale that PYPL has amassed is not easily replicable due to the network effects, providing a line of defense against its competitors.

Growing Braintree traction a double-edged sword; positive for TPV but places pressures on margins. Braintree, a key driver of TPV growth, is a full-stack payments platform which allows retailers to accept online payments more broadly. In FY24F/FY25F/FY26F, consensus expects the number of transactions processed by Braintree to grow 23%/19%/14%. Unbranded processing TPV, primarily from Braintree has grown 18% yoy in FY23 resulting in higher transaction costs from 44% of revenue in 2022 to 48% of revenue in 2023. With higher transaction expenses and lower gross yields, group margins and take rates could be dampened by Braintree’s growing share.

Global slowdown. An economic downturn may lead to a decline in e-commerce volumes and consumer spending which will negatively affect PayPal’s total payment volume and earnings. Intensifying competitive pressures may weaken PayPal’s first mover advantage.

Intensifying competition. While PayPal retains its dominance, there is growing competitive pressure from other players such as Apple Pay, Google Pay and BNPL firms such as Affirm and Klarna.

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