PayPal’s Q1 2024 Earnings Review
Turnaround in Progress ✅
Company Overview:
PayPal Holdings ( PYPL 0.00%↑ ) is a multinational fintech tied to global eCommerce and the adoption of digital payments. The company operates a global two-sided ecosystem consisting of 30M merchants and 400M consumer accounts. Established in 1998, PayPal’s development early in the evolution of e-commerce allowed the company to build and maintain a dominant competitive position in online payments. The company generates ~90% of revenue from transaction fees (Take-rates) based on the volume of payments processed (TPV). While the company reports two lines of revenue, their business can be divided into the following 4 main divisions: PayPal Branded, Braintree, Venmo, and Value-Added Services.
Q1 2024 Highlights
Revenue: $7.7B (+9% YoY)
Operating Income: $1.16B (+17%’)
OI Margin: 15.17%
Adj. Free Cash Flow: $1.9B (+86%’)
Adj. FCF Margin: 24.68%
PayPal reported stellar Q1 Earnings, beating analysts’ expectations for both top and bottom line. Net revenue increased 9% year over year, a modest acceleration from the previous quarter. Year-over-year growth in PayPal-branded volume improved to 7% on a constant-currency basis, while growth at Braintree slowed a bit to 26%. Operating margins improved to 15.17%, with management citing cost savings as the driving factor. We believe that this quarter is a water-shed moment for the business as it highlights efficiency gains to profitability while also reaccelerating growth through much needed product improvements.
During the earnings call, CEO Alex Chriss spoke to recent product improvements, stating,
“In the first quarter, we revamped the PayPal app with a new look and feel and introduced enhancements to our rewards program to enable shoppers to get the most out of their money while increasing conversion from merchants. Additionally, we began testing a comprehensive rewards-focused life cycle marketing program. When tested with approximately 20% of our PayPal app users, we saw it drive a nearly 7% increase in weekly app logins and 4% increase in transaction margin per user.”
The company generated adjusted free cash flow of $1.9B for the quarter and $5.4B over the last 12 months. Much of this free cash flow is currently being used to repurchase shares at what we believe to be attractive levels. On a trailing 12-month basis, share repurchases of $5.1B reduced weighted average shares by 5%. Management told investors on the earnings call that they expect Free Cash Flow for 2024 to come in at approximately $5 billion and to spend at least $5 billion for share repurchases.
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At the time of writing, PayPal has a market value of approximately $70B, or $66.14 per share. The stock has performed poorly over the past three years, falling over 70%, largely due to concerns over rising competition from the likes of Stripe, Adyen and Block, as well as big tech players such as Apple and Amazon. While we expect market share pressure to continue over the shorter term, we view this pressure as being mitigated by the massive TAM opportunities globally. Ultimately, we view PayPal as a fundamentally attractive business with a strong competitive position, durable revenue growth, healthy margins, a clean balance sheet, and significant cash flow generation.
Valuation:
Upon review, we have increased our base case fair value estimate for PayPal from $85.80 to $93.22 per share which would equate to a ~$100B market cap; a 41% increase from today’s price. This increase is based on cost-cutting initiatives that we believe will structurally improve bottom line earnings moving forward. Our updated DCF model makes the following assumptions:
10-YR Revenue CAGR: 7.19%
Average Operating Margin: 17.83%
Average FCF Margin: 19.36%
WACC: 12.20%
TGR: 2.5%
For our original investment thesis on PayPal, Click Here!
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Sincerely,
Jack Beiro, MBA
JB Global Capital
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