To The Moon

PayPal stock is down about 16% in the last year. The S&P 500 is only down 1%. PayPal took a beating.

This is not a unique situation, however. Many tech stocks had a rough 2022. There was a selloff in tech at large, and few companies seemed exempt.

As inflation soared, rates went up, and thoughts of recessions loomed in the air, unprofitable stocks suffered. Many of these were tech names that thrived during an era of growth at any cost.

I’ve been looking through those names, and a few weeks ago I think I found a diamond in the rough. Looking through large cap stocks that suffered the most serious declines, it was hard to find any firms with reliable profit. Positive net income was scarce, and several years of it was almost out of the question.

I bought PayPal 3/21/23 and have expanded my stake since.

PayPal stood out in the crowd. Here’s the PayPal story.

PayPal’s 1 year returns are still -16%, despite much of tech recently getting a breath of fresh air after the tech sell off. They’re down tremendously from their highs of 2021, so are they a diamond in the rough?

I’m going to discuss PayPal in the modern day, but honestly they’re a pretty old stock for software. They IPO’d in 2002. Then they were almost immediately acquired by eBay. During this time PayPal bought Venmo and made other notable acquisitions to become the pay services giant they are today.

They existed within the eBay umbrella until PayPal was spun out in 2015. We’ll explore their more relevant business model and financials in the modern era.

The fear of tech is that it delivers on revenue growth but fails to generate net income. PayPal does both. PayPal had 19.7% revenue CAGR from their earlier days of $3B 2010 to their stock’s peak in 2021 with $25B.

This growth is unstoppable and seemingly unwavering, as PayPal followed this run by reporting $27B revenue in 2022. While 2022 was a mere 8% addition, breaking the trend of a decade of double digit growth, PayPal never stopped growing.

Trasactions

PayPal has maintained steam by expanding the number of transactions on their platform. The number of transactions in 2015, the year of their spin out, was 4.9 billion. In 2022? Up to 22.3 billion.

This has been catayzed by the digitization of US business. When I was in high school, I couldn’t pay for things with my phone. I went to a coffee shop and used cash or card.

In college, everyone used Venmo. Friends, partners, classmates all use Venmo to pay each other back, pay club dues, and of course sometimes order coffee. Businesses accept these payments now, especially when you order ahead (which is now more available after the pandemic).

An interesting note here is that even if businesses didn’t adopt digital payments, people have found new uses for PayPal’s services. I far more often see friends share a bill at a restaurant or for groceries because it is easier to just Venmo each other the difference after the fact.

Venmo is just my world, but it is a subset of the greater PayPal empire.

PayPal gets more transactions out of its users every year. In 2015, users were making 27 transactions a year. In 2022, that was up to 51. And 51 leaves a lot of runway for more, given that our opportunities for exchange are far above that in a given year.

Income

So they have use cases, they have users, they have revenue. What about net income?

Depending on who you ask, this is either their winner or loser. Let’s start with the loser.

PayPal’s net income was 1.2 billion in 2015 and 2.4 billion in 2022. The ugly side is that PayPal nearly tripled revenue, but only doubled net income. There is still net income expansion, but it doesn’t tell a story of unlocking income growth with scale.

Let’s zoom out. In 2021, net income was over 4 billion. Same with 2020. So PayPal has actually shown some pretty robust income in recent history. The decrease was mostly due to a loss on investments and a shock from their income tax expense.

Let’s look at it another way. PayPal has a long history of delivering net income. How many tech names can say that? Very few. This is a cash generator in a beaten field that has been systematically sold off.

PayPal has also been able to expand its net income. Maybe it won’t get back to that $4B figure in 2023, but it has still seen a nice run of growing income over time. Even in PayPal’s earnings shocks, it still delivers on the bottom line. That makes it a winner.

Consumer spending

So why is it still so far down?

Part of the reason is that people expected PayPal to keep up the 15–20% growth and the high net income. The stock fell from 360 to 70 to price in the adjustment of financials described above. But I think it’s pricing in more than that.

There have been woes of the consumer and transaction volume. A huge critique of PayPal that I’ve consistently read is that shaky consumers will lower their transactions. PayPal has even mentioned uncertain macro factors themselves in their recent earnings reports.

If the United States consumer spends less and lowers their transactions, PayPal could lose. But the issue is that people have expected consumers to back off for the last few months. People have already been trading PayPal like consumers would back off. But they didn’t.

Consumer spending smashed expectations this week and is considered a shining star in the economy, growing faster than this last quarter’s 1.1% GDP growth. If anything, consumer spending is dragging up economic activity rather than shying away.

Mastercard crushed its earnings this morning because of this. They cited a strong consumer, much stronger than expected, even in a tough environment.

I think that PayPal has priced in a worse consumer, a recession consumer, and that’s just not what we’re witnessing. When they report a few quarters of earnings that reflect consumer strength when people expected weakness, there should be a positive shock to the stock.

On top of this, it has been part of the tech rut in which investors have shed their tech positions at large. Its financial position is too attractive to treat like the rest of tech. It keeps getting more users, more transactions per user, and thus way more volume (over $1.3T in annual volume). This is unlikely to stop.

This is the name in tech that I like right now. I make the most money when I buy at a great price. A lot of my greatest trades have been buying stocks that the street beat down. PayPal is way cheaper than it used to be. I think it’s going to be one of those winners.