(Paypal) (PYPL)
Overview of the Company - PayPal is a financial services company that provides a platform for digital transactions. PayPal also owns Venmo and Xoom. These subsidiaries, as well as their main company, is a top competitor for payment solutions for small businesses.
Fundamental Analysis - PayPal is set to benefit from the recovery of small businesses in America. More broadly, PayPal is one of the main beneficiaries of the entrepreneurship culture in America. It is becoming more and more obvious that the only way to create massive amounts of wealth is to be your own boss. This pursuit of entrepreneurship is the new American dream - no one wants to work under another person. This comes with massive risks and there is a reason why most small businesses fail within the first year and many don't reach break even. This doesn't matter for PYPL however, because all PYPL needs is for these transactions to keep coming. It doesn't matter if a business fails, as long as one pops up in its place. PayPal makes money from fees on transactions occurring on their platform and so as long as the volume is high, earnings will be high as well.
How (PYPL) Stacks Up to Competitors - I will compare PayPal ($250 billion market cap) with other companies focused on creating payment solutions for the smaller businesses of America. Square (SQ) at a $105 billion market cap and Shopify (SHOP) at a $200 billion market cap. Unlike SQ and PYPL, Shopify makes money from fees on transactions but also subscriptions and advertising from its unique platform designed to promote small businesses. Shopify has the highest profitability and return on equity with PayPal close behind. Square lags. SHOP again leads in revenue and earnings growth over the last year by a wide margin. Square is the most expensive not only from a Price to Earning perspective but trades almost 40 times book, while PayPal is at 11x and Shopify at 16x. Although PayPal is slightly bigger in market cap than the others, its cash flow is very impressive. With almost $6 billion in operating cash flow compared to the >2 billion of Shopify and Square combined, it is clear that PayPal has the most sane evaluation. PYPL does not have the earnings growth of Shopify but it trades at a reasonable valuation for a fast growing business.
Bull Case - Paypal is the best bet for gaining exposure in the digital payment industry. Competition is tough, but this sector will only grow and grow over the coming decades. Paypal is appropriately priced in the markets right now and it is a good entry point into a company that will continue to thrive for years to come.
Bear Case - With other digital payments companies stealing PayPal’s thunder, PYPL will not be able to justify their valuation and be forced to trade at a lower multiple than other technology stocks. Projected growth for the company is too high and Paypal will disappoint in future earnings reports.
Valuation and My Price Target - I believe that PayPal will be able to meet expectations this coming year and produce an EPS of about $4.75. I think PayPal will get comfortable at around a 55 P/E and thus, we get a price target of $261. However, I believe that PYPL will retest highs around the $290’s. In the coming year I think we will see the stock resume trading in its $250-$290 range, and I think right now is a great entry point.
The Verdict - BUY HOLD SELL
Even though annualized returns are only projected to be around 23%, I think Paypal is a company that any investor should be in for the long run. I would expect an annualized return of about 20% a year for the coming years, even with stiff competition. PYPL is the best business out of the three and will continue to be the leader in the digital payments industry. On that note I believe PayPal is currently a BUY.
*all data provided by yahoo finance and nasdaq.com