Description

Prelude: Paypal has been written-up a fair bit in the past, but the pitch here is predicated on the new CEO's strategy coupled with a very attractive setup for the stock after a very conservative FY2024 guide.  

Thesis: 

Paypal is a decent business that was mismanaged.  But now there’s new management, acting as a catalyst for change and focused on the right strategy: 1)  Profitable growth: focus on profitable growth across the company and specifically at Braintree, 2) Paypal Branded Checkout: continue to take ‘fair share’ of ex-Amazon ecommerce by improving the checkout experience and redesigning the app, 3) Venmo: begin to monetize and create a single platform, 4) continue to leverage efficient opex spend. 

Taking a step back, prior management under Shulman had neglected the core businesses with a strategy to become a ‘super app’ akin to the internet companies in Asia by adding features like savings, bill pay, crypto, shopping, etc.  They then used marketing dollars to chase lower quality customers with worse LTVs.  These unprofitable efforts were masked by the Covid-led ecom growth, but later became apparent as the consumer transitioned back to a post-covid world. 

The result is gross profit dollars haven’t grown in 3 years, but the core business (branded Paypal checkout and Braintree) is both growing and profitable.   Branded checkout is holding share excluding amazon (potentially slightly improving share, see appendix), and together would have gross profit dollars compounding MSD% on a standalone basis.  This growth however is being offset by drags on the business that will roll-off with exited initiatives like “Paypal Here” and others.  In a base case, without any new initiatives, Paypal is growing gross profit MSD, EBIT HSD with opex leverage, and EPS double digits with a buyback. 

Beyond that, Paypal is getting early traction on this new Fastlane product which could be a very big deal to accelerate growth and profitability for Braintree.  This feature allows guest checkout shoppers to simply enter an email address and allow the rest of the information to be populated automatically utilizing the ~400mm+ active member information.  More importantly, It’s likely they can monetize this for a material net take rate improvement over the 16bps they currently earn on Braintree, somewhere between 20bps and 100bps.  

In summary, the setup from here is much more attractive, particularly in this tape, with a low bar on the back of ‘flat eps’ guidance and anemic sentiment, an undemanding low teens GAAP multiple of earnings for a business that is poised to reaccelerate EPS double digits, a net cash balance sheet, a healthy FCF yield that is HSD, and a shrinking share count (5-6% annually w/ buybacks).  There are some additional ‘call options’ for the business if Venmo monetization actually materializes (near-term with some new initiatives to help users spend their balances, and longer-term if they actually allow full-interoperability between Paypal and Venmo).  Similarly, there’s optionality around offline volume growth if NFC accessibility on iPhones becomes reality over time.  $6 of GAAP eps in ’26 seems quite achievable and on any reasonable multiple there is healthy upside toward $80-90+.

Misperceptions:

• Paypal is dying:  On the branded side, Paypal checkout is currently outpacing US ecommerce growth excluding Amazon (which is growing MSD).  While Apple Pay has become a major payments business, this is almost entirely a ‘brick and mortar’ offering (simply replacing the need for a physical credit card), while Paypal volumes are nearly exclusively online.  Braintree (unbranded checkout) and Venmo are also both seeing outsized growth and the combined business should be growing TPV in excess of V/MA algos.  Paypal currently processes nearly 1/3 of all ecommerce payments outside of Amazon (up from mid-20’s pre-covid).  See Appendix
• Paypal has no reason to exist:  Paypal/Venmo is also still the leading P2P payments network facilitating money transfers between friends and family which helps ensure engagement and app installs from the ~425mm user base.  On the commerce side, Paypal has over 35 million merchants integrated for payment acceptance and is a payment option for ~80%+ of US ecommerce outlets (including the exclusive e-wallet option for some of the largest US retailers such as Nike, Home Depot, and Best Buy).      

Investment Highlights:

• Quality business:  reasonable margins, profitable unit economics, low capex, large consumer network with network effects, global ecommerce integrations that are hard to replicate.
• New management w/ right strategy leading to earnings inflection:  The new CEO’s focus on profitable growth and the initiatives laid out including value-add services for Braintree and a better consumer experience, new app, and rewards for consumers set the business up with a plausible path for earnings inflection.  Not only is the core business likely to see better growth/margins, but cost optimization and the exiting of unprofitable businesses will augment this inflection.
• Low guidance bar, sentiment, easy comps:  Earnings are de-risked after the ‘flat EPS’ guide on Q4, street numbers have come down, and investor sentiment is low.
• Attractive valuation:  Paypal trades for less than 15x GAAP EPS and is now attractively priced both intrinsically and relative to the market / historicals in light of the potential for positive earnings revisions on a low bar.   
• Balance sheet and capital allocation:  There is net cash on balance sheet, the business generates healthy FCF (HSD FCF yields), and the management team is committed to utilizing FCF to buyback stock (~$5bn+ of buybacks guided for ’24).
• Other benefits:  The business benefits from higher interest rates (Venmo/Paypal balances), it is a “toll-taker” on inflation (earn a % of payment volumes), and can leverage AI to take out costs (customer service, fraud, etc.)
• Call options:
  • Offline usage:  The majority of commerce still takes place offline and new potential regulatory changes for NFC w/ iOS may help accelerate offline payment volumes.
  • Monetization of Venmo:  Venmo and P2P is currently unmonetized, but management is now focused on making it easier to utilize these balances for commerce and ultimately unifying the Paypal and Venmo networks (which should unlock a host of avenues for Venmo users to shop/use their balances).

Key Risks:

• Branded market share: Apple Pay other digital wallets including offerings from Amazon, Shopify, and the card networks are providing alternative payment ‘buttons’ on select ecommerce vendor storefronts.
• Unbranded competition:  Competition from Stripe and Adyen is fierce and these competitors are each ~2x the size of Braintree in terms of payment volumes.
• Take rate compression:  A ‘race to the bottom’ on pricing could ultimately squeeze take rates to the point where profitability declines even if volumes grow.  Need to confirm incremental take-rates are positive.
• Technicals:  Very near term, the stock appears a bit extended and could get a better entry at ~$60-61.

APPENDIX:

• Paypal has continued to gain share of US ecommerce excluding Amazon (growing from ~26% in ’15 to ~31% at end of ’23)
• 
  Branded Paypal has historically outgrown ex-Amazon US ecommerce by several hundred basis points, performed better during covid, and returned to growth above ex-Amazon US ecommerce in ‘23

Catalyst

• Earnings
• Traction with Fastlane
• Investory Day (likely later this year w/ new growth algo for business)
• Regulatory changes governing NFC on iOS