PayPal: The World’s Most Valuable Fintech Company

PayPal is the world’s most valuable fintech enterprise. It enables global commerce across multiple platforms and devices and provides new buying opportunities to consumers and businesses globally. The huge global firm processed almost $1.4 trillion in gross payment volume in 2022.

Ever since eBay spun off PayPal in 2015, PayPal’s stock has more than doubled in value. However, PayPal’s stock has dropped by 36% over the last 12 months. It underperformed the S&P 500, which fell 11% during the same period. Over the recent quarters, weak consumer spending has hurt the performance of fintech giant PayPal.

Read on to learn more about PayPal, how the stock performed in 2022 as well as its expected performance in 2023.

About PayPal

PayPal Holdings, Inc. is an American technology company. It operates an online payment system in many countries that support online money transfers and provides an electronic alternative to traditional paper methods such as checks and money orders.

Founded in the late 1990s as a payments system for Palm Pilot users by a software company called Confinity. The company later merged with an online banking company, and officially took the PayPal name in 2000.

PayPal became the preferred payment method for eBay buyers and sellers. eBay decided to acquire PayPal in 2002 and made it the site’s official payment service.

In 2015, PayPal became an independent company. The company’s shares trade on the Nasdaq under the ticker symbol PYPL.

PayPal reported revenues of $7.38 billion

In 2022, PayPal made a record annual revenue of $27.5 billion. This included record revenue of $7.38 billion in the fourth quarter. These numbers were up 8% and 7%, respectively, compared to the same period a year ago.

However, the stock price plunged because

profitability took a big step back. In 2022, earnings per share (EPS) were down 41% year over year to $2.09. Growth fuelled by the pandemic motivated the company to go after a lot of opportunities which ultimately had an impact on its profitability.

Moreover, the company has identified opportunities to make cost savings of $600 million on top of the $1.3 billion in savings it’s already made. This indicates that profitability is expected to improve in the coming year, which should be positive for the stock. Even though profits were less, PayPal is still quite profitable with $5.1 billion in free cash flow (FCF) in 2022.

A positive for investors is that PayPal stock trades near its lowest price ever. Its price-to-sales (P/S) ratio is about 3 which is well below its historical average. Indeed, it may take a long time for free cash flow to get back to historical levels. PayPal’s FCF margin was consistently above 20% before dropping below 19% in 2022.

Furthermore, the company is giving most of its free cash flow back to shareholders in the form of share repurchases. In 2022, 82% of its free cash flow was used to buy back shares. And in 2023, the company intends to use 75%.

2022 was still a profitable year for PayPal

2022 was still a profitable year for PayPal, with an 8% increase in sales to $27.5 billion. The total payment volume was $1.36 trillion, up 9% compared to 2021. The business also added another 8.6 million net new active accounts. This brought the total to 435 million. Everything considered, this is reasonable growth, although not at the rates that shareholders experienced in 2020 and 2021.

What’s impressive about PayPal is its capability to produce cash. The company produced $5.1 billion of free cash flow (FCF) in 2022. This was up 4% year over year. Shareholders welcome this right now due to the uncertainty rattling markets and the economy. Generating plenty of FCF, in addition to PayPal’s net cash position of $5.1 billion (as of Dec. 31), can allow the company to continue to invest in profitable growth opportunities when competitors might be a bit more cautious with their capital expenses.

“While the macroeconomic backdrop remains challenging, we’re energized by the significant opportunity we have to advance our leadership in payments and better serve our customers,” Chief Financial Officer Gabrielle Rabinovitch said on the Q4 2022 earnings call.

PayPal relies on increased spending for its success, but the current economic environment isn’t exactly the best. However, the company expects revenue to increase 9% in the current quarter, with Q1 2023 adjusted earnings per share (EPS) rising between 23% and 25% year over year.

PayPal is trading higher than the rest of the market

PayPal stock is down 77% from its highest value in July 2021. Currently, it sells at a trailing price-to-earnings (P/E) ratio of 34. The stock’s average historical P/E multiple is 51, so the valuation today looks strong. However, PayPal is trading higher than the rest of the market. This situation could present some downside risk if the business misses quarterly analyst expectations or if the market decides to favour safer stocks even more than it already does.

It may be difficult to predict what will happen with a stock in a 12-month period, but it’s certain that PayPal and all businesses are currently riding a difficult economic environment.  With inflation still at a high level, consumer spending is coming under rising pressure. As PayPal rises and falls with non-essential purchases, any decline in spending means that the business and the stock could be challenged in 2023.

Investing in the long-term

Investing is a long-term activity so investors should be looking out over the next three to five years when analysing whether PayPal is a good investment today.

PayPal might look like an attractive opportunity. Wall Street analysts believe that, between 2022 and 2026, PayPal’s revenue and earnings per share will rise at compound annual rates of 8.3% and 24.2%, respectively. If these forecasts happen, then that would help push share prices higher over time.

Despite its huge lead in the world of digital payments, the business has powerful competition, especially from Apple Pay, as well as from Block, which competes more directly with PayPal to attract merchants and individual consumers.

Final thoughts

PayPal is the highest-valued digital payments platform globally and has been around for more than 20 years. It is constantly looking to the future and developing new technologies to improve its services and stay ahead. Even though it is a well-established name in the global fintech industry, competition is very intense and PayPal will need to continue innovating to stay ahead.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.

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