PayPal's margin expansion potential in future years is not fully appreciated by investors, as management has chosen to rapidly increase investmentsĪs of its February 2021 investor day, PayPal is targeting a 2020-25 EPS CAGR of 22%, powered by a 15% CAGR in Active Accounts, a 25% CAGR in Total Payment Volume ("TPV"), and continuing EBIT margin expansion.and the U.K., which were historically 65% of revenues (in 2019) There is significant potential in new geographies, beyond the U.S.Source: PayPal results presentation (Q4 2020). PayPal also has a long-term vision of building an integrated payments ecosystem that includes both online and in-store purchases, payments (including P2P and B2C), consumer rewards, Buy Now Pay Later, etc.As a two-sided payment platform with visibility over both parties in every transaction, PayPal has key advantages in data, speed, security, etc.Payment networks are great businesses, thanks to their mission-critical nature, network effect, recurring revenues, natural pricing power, and operational leverage there is a structural shift to electronic payments.Our investment case consists of the following: Our reduced forecasts indicate a total return of 157% (27.3 % annualized) return by 2025 year-end, and we reiterate our Buy rating. PayPal is now trading on 27.3x non-GAAP 2021 EPS (and 35.5x GAAP EPS). We continue to believe PayPal possesses unique advantages that will enable it to benefit from the continuing shift to electronic payments. However, 2025 revenue, EPS, and cash flow targets were reaffirmed, and our analysis shows PayPal's recent growth acceleration is real. 2022 financial guidance was also reduced. These cast doubt on PayPal's recent growth. Investors were likely unnerved by a change in strategy, moving away from a focus on Net New Actives ("NNAs"), guiding to a much lower NNA in 2022 and restating some recent NNAs as "illegitimate". Librarian Capital PayPal Rating History vs. PYPL stock is now 9.5% down since our upgrade, with a 46.2% decline since the end of 2020: We upgraded our rating on PayPal to Buy in May 2020. PayPal Holdings, Inc.'s ( NASDAQ: PYPL) share price has fallen 28.3% since Tuesday (February 1), when Q4 2021 results were released after markets closed.
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