Updated: Apr 12, 2021

PayPal: The best company in fintech

What We Love:

  • PayPal is a major player in the rapidly growing fintech sector.

  • PayPal has expanded from online payments to a full service online bank and owns Venmo and Honey.

  • Paypal expects to double its users to 750 million by 2025.

  • Businesses are increasingly allowing customers to pay using PayPal.

  • PayPal has successfully tapped into bitcoin’s success by allowing users to buy and pay with bitcoin using the service.

What We Don’t Like:

  • PayPal’s decision to associate itself with bitcoin could dramatically hurt the company if bitcoin crashes.

  • PayPal’s share price is relatively expensive on a PE basis.

  • PayPal faces increasing competition from Square’s Cash App.

Full Report:

Originally founded by legendary innovator Elon Musk in 1998, PayPal has come a long way from its original use as an online payment platform mainly used for Ebay purchases. Today, PayPal operates as a full service online bank, allowing users to cash checks, deposit money, take out short term loans, and send and receive money in the app. The company is also a primary online method of payment, is expanding its ability for users to pay at physical stores, and allows customers to buy and pay with bitcoin in app. On top of this, PayPal owns the incredibly popular money transfer app Venmo and the online shopping coupon saver Honey. The company is truly a fintech behemoth.

PayPal’s revenue comes mainly from its transaction fees, where it takes a small percentage of the total transaction from payments made to sellers and transfers. These fees composed 93% of the company’s $21.5 billion the company had in revenue in 2020. The remaining 7% of the revenue was made from “value added” services like helping businesses and interest it collects from its short term loans. While the revenue stream is not very diversified, it is not a major risk as transaction fees are the industry standard for revenue in the fintech sector. The revenue also continues to grow at a steady rate around 25% year over year.

PayPal wants to become the primary way users interact with their money. The app now has all the features of a regular bank, including cashing checks, storing money, getting short term loans and provides an easy to use payment system for online purchases. The company also rolled out a feature where users can scan a qr-code at physical stores to pay for purchases. Looking at PayPal’s offerings we at People’s Capital believe PayPal users will increasingly use the app for their daily money needs.

On top of its core app, PayPal owns Venmo, an incredibly popular money sending service where it collects revenue by charging a 1% fee if users choose to transfer money from their Venmo account to their bank account immediately. Finally, PayPal owns Honey, a web extension that automatically applies coupons at online checkout to ensure the best price. With Honey, PayPal has an incredibly strong position in e-commerce as the company offers an easy to use method of payment and helps users get a better price on their purchases.

While the pandemic has done incredible damage to the overall economy, PayPal has benefitted from the transition to online purchases. The company saw net income nearly double in 2020 as more people than ever shopped online. This transition to e-commerce is here to stay and more businesses than ever accept PayPal as a method of payment. In a recent earnings call about this historic year, PayPal stated that they expect nearly 750 million users by 2025, more than double the number they have today. This is incredible user growth by any metric.

There are some risks to PayPal however, starting November of last year PayPal launched a service that enables users to buy bitcoin on the app. This was a smart decision by PayPal and the company has been well rewarded as interest in bitcoin has boosted user growth. Yet while bitcoin has helped the company grow, a drop in the price of bitcoin would substantially hurt the company as they have invested heavily in the cryptocurrency.

Paypal also is a pretty expensive stock with a PE of 66.7. This is significantly higher than the overall PE ratio of companies in the S&P 500, which is only 34. As such, it is important for investors to know they are paying a premium for PayPal stock.

Finally, while PayPal is the dominant company in fintech, it is facing increasing competition from Square who also offers fully online banking services. We at People’s Capital believe PayPal is better positioned than Square because it has an established user base and is much better positioned as an online method of payment.

Bottom Line:

PayPal offers the best investment possible in the fast growing fintech industry. Over the course of the past 20 years the company has transitioned from a simple means to pay for late night Ebay purchases into a fully serviced online bank that enables users to pay for goods across the internet. PayPal’s ownership of Venmo and Honey should also help the company fend off competition from Square. The company also has incredible user growth and will likely be the dominant fintech company in 5 years. Looking at these factors, People’s Capital thinks PayPal is a buy and will provide strong returns. It should be noted that this is a long term position, on a 2-4 year horizon. In the short term, depending on stimulus, the state of the pandemic, and general instability in the market, PayPal could see declines before rising.


The People’s Capital Team

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