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MarketScreener Homepage  >  Equities  >  Nasdaq  >  PayPal Holdings    PYPL

PAYPAL HOLDINGS

(PYPL)
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PayPal Holdings : Race to scale, strategic advantages

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01/21/2019 | 04:15am EDT

PayPal clearly manages to fly on its own since it got separated from eBay in 2015 following a highly anticipated spin-off.

The American company is a pioneer in the online payment industry and one of the competitors of Wirecard which was featured here before.

 

 

PayPal clearly manages to fly on its own since it got separated from eBay in 2015 following a highly anticipated spin-off: the turnover is going through the roof - from $9 billion back then to almost $15 billion expected for the year - and the operating margin increases substantially too, currently flirting with 20%.

Once it obtained its independence, PayPal made a series of acquisitions - among which the very popular companies Zenmo and iZettle - for a total amount of around $4 billion. These acquisitions have been fully auto financed, which hasn’t kept the company from reducing its debt to zero.

 

 

These signals show the intrinsic quality of PayPal’s business, which generated $2 billion in profits last year. This self-sufficiency is strategic because the online payment industry is evolving fast: the agglomeration of new services is, therefore, a condition sine qua non for success and a company’s ability to make acquisitions is the surest way to achieve this before the competition does.

The proof: the 102 merger-acquisition types of transactions made in the first semester of 2018 alone have reached a total volume of $46 billion, a sharp increase compared to 2017 when the total transactions reached $33 billion.

If the capital markets seize up - which, after all, happens more or less inevitably in successive cycles - PayPal will still be able to develop its business and protect its market share.

Let’s note however that the American company isn’t the only one benefiting from this competitive advantage: its main competitors are also very profitable and running the same scaling race. Entering the European market will be complicated and the Chinese market - monopolized by WeChat - will probably be prohibited.

PayPal continues to capture new market share in North America - and elsewhere in the world - and currently supports 255 million active accounts, a number that is up 15% compared to last year.

The company’s financial position is remarkable - with, as we said above, a long-term debt level that is zero - and the company’s ability to raise capital to make a transformative acquisition is quite enviable, especially at the current share price, which is at an all-time high and thus represents a potential bargaining chip.  

PayPal’s market capitalization of $107 billion implies a valuation of around 43 times the expected profit in 2019, a multiple that is a lot higher than the market average. This clearly anticipates a continuation of the excellent growth momentum that started over the last decade. 

 

 

As we wrote in our Wirecard analysis there is room to capitalize: no one doubts that the volume of online payments will continue to grow at a steady pace. For the first half of the year alone, for example, the volume of transactions managed by the German company went up by 48% - PayPal handles a business volume that is a lot bigger and benefits from a better global brand awareness.

PayPal’s management seems to be very confident about the company’s prospects since it’s been buying back shares massively for three years now - including at the current valuation levels which raises some questions when it comes to the adequacy of this capital allocation.

These significant buybacks are without a doubt being used to compensate the substantial stock option compensations - which are dilutive for the shareholders - since the latter reached $733 million in 2017, almost 6% of the operating expenses. 

At the current share price, the success of an investment in PayPal shares will, therefore, depend on the company’s ability to deliver results that are in line with the market’s ambitions. The latter hasn’t been disappointed yet, and rightly so: among all the current manias - electric cars, co-working, social media, etc. - the electronic payment industry is the only one to produce significant profits.


Neelie Verlinden
© MarketScreener.com 2019
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Size 2019e 2020e
Capitalization 132 098 M$ -
Entreprise Value (EV) 125 252 M$ 122 516 M$
Valuation 2019e 2020e
P/E ratio (Price / EPS) 54,7x 45,3x
Capitalization / Revenue 7,35x 6,25x
EV / Revenue 6,97x 5,80x
EV / EBITDA 27,4x 22,3x
Yield (DPS / Price) - -
Price to book (Price / BVPS) 8,18x 7,28x
Profitability 2019e 2020e
Operating Margin (EBIT / Sales) 22,4% 23,0%
operating Leverage (Delta EBIT / Delta Sales) 1,22x 1,18x
Net Margin (Net Profit / Revenue) 13,9% 14,1%
ROA (Net Profit / Asset) 6,29% 6,60%
ROE (Net Profit / Equities) 19,7% 20,9%
Rate of Dividend - -
Balance Sheet Analysis 2019e 2020e
CAPEX / Sales   5,13% 5,02%
Cash Flow / Sales 25,4% 27,2%
Capital Intensity (Assets / Sales) 2,22x 2,13x
Financial Leverage (Net Debt / EBITDA) -1,50x -1,75x
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Mean consensus OUTPERFORM
Number of Analysts 44
Average target price 114 $
Last Close Price 112 $
Spread / Highest target 20%
Spread / Average Target 1,5%
Spread / Lowest Target -65%
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