PayPal's Braintree division has hit its low point; prepare for a strong rebound
PayPal (PYPL) is poised for moderate growth in the coming year, with analysts predicting a price increase of between 8% to 22% over the next 12 months [1][2][3]. This optimistic outlook is backed by PayPal's impressive revenue growth history, having seen a surge of over 222% since 2015, and its dominance in the online payments and merchant services sector.
The company's strong financial performance is evident in the third quarter, where it reported a 5% Year-over-Year (YoY) growth in transaction margin, amounting to $3.844 billion [4]. Despite this growth, PayPal's non-GAAP EPS remained flat, jumping 18% YoY to $1.40 [5].
However, the digital payments market is not without its challenges. PayPal faces stiff competition from companies like Apple Pay (AAPL) and Coinbase (COIN) [6]. To counter this, PayPal has been focusing on "profitable growth," resulting in slow 2% YoY growth in active accounts [7].
The e-commerce market is expected to continue its growth trajectory, and PayPal is expected to benefit from this trend [8]. Consensus estimates call for PayPal to see an acceleration to around 6% top-line growth next year [9]. If management can execute on accelerating growth rates, the valuation could rise to around 20x or even 25x earnings [10].
PayPal's financial health is robust, with a net cash balance sheet and a consistent history of stock repurchases [11]. As of the most recent quarter, PayPal ended with $13.7 billion in cash, cash equivalents, and investments, and $11.5 billion in debt [12].
Despite these positive indicators, PayPal's stock has underperformed the broader market by around double-digits since its last coverage in June [13]. On the conference call, management noted that their full-year guidance "could absorb up to a couple of points of deceleration in e-commerce spending" [14].
Analyst sentiment towards PayPal is generally cautious to moderately positive, with consensus ratings around "Hold" to "Moderate Buy," reflecting a balanced view of growth potential and risks [1][2]. The share repurchases offer an attractive shareholder yield of around 7% [11].
However, potential risks for PayPal include intensified competition in the digital payments space, significant debt repayments, and the end of pandemic-related tailwinds that boosted usage [1]. The company's debt repayment obligations are expected to rise from $361 million in 2021 to over $1 billion in 2023 [1].
In conclusion, PayPal's growth prospects are promising, with moderate upside potential driven by its strong revenue growth and market share in payment processing, cloud solutions for businesses, and continued adoption of digital payments [1][2][3]. However, increased competition, significant debt repayments, and the post-pandemic environment could impact profit margins and stock performance [1].
[1] CNBC [2] The Motley Fool [3] Yahoo Finance [4] Seeking Alpha [5] Yahoo Finance [6] Seeking Alpha [7] Seeking Alpha [8] Yahoo Finance [9] Consensus Metrix [10] Seeking Alpha [11] Seeking Alpha [12] Yahoo Finance [13] Seeking Alpha [14] Seeking Alpha
Investors interested in technology companies might consider PayPal as an opportunity for investing, given its predicted growth of 8% to 22% over the next 12 months and its strong financial performance. To further bolster this investment, PayPal has been focusing on profitable growth, which has resulted in a slow 2% YoY growth in active accounts.
