PayPal is the industry-leading payment processing company who revolutionized payments on the internet upon its founding.
The business operates a secure and fast payment rail to facilitate money transfers and payments over the internet with almost half a billion active accounts.
The growth of Venmo in person-to-person ("P2P") finance has been explosive and leads the P2P money transfer market share.
PayPal benefits from a two-sided network effect with payments via the internet. As the number of merchants that accept PayPal and the consumers / business that utilize the service grow, the whole ecosystem improves and becomes harder to disrupt.
PayPal will continue to benefit from the enormous secular growth of digital payments globally and is well-positioned to take advantage of new trends that arise in payments globally.
Key Company Metrics
A set of metrics we constantly keep updated to monitor the investment thesis.
PayPal operates a classic example of a two-sided network that benefits users on both ends - merchants and consumers. The Payments Platform is platform agnostic, meaning it is supported by an array of technologies, including digital, mobile, and in-store.
The wide acceptability of PayPal is both the cause and effect of the Payment Platform's convenience, popularity, and overall value proposition to merchants and consumers alike. In simpler terms, as the number of active accounts grows and merchants are increasingly motivated to accept PayPal for payments, the Payments Platform becomes stickier for existing users and an attractive platform for new users to adopt.
As the service becomes stickier, competitors' products look less attractive to the consumer and PayPal becomes harder to disrupt.
Global Scale & Brand
PayPal is undeniably large, being an accepted payment platform across 200 regions around the world. On top of the several hundred million active consumer accounts on the platform, there are almost 30 million merchants that accept PayPal across all those geographies.
The sheer size and wide acceptance of the platform makes PayPal's competitive position versus peers more attractive.
From a regulatory standpoint, governments are more likely to accept a payments method that has been proven to work time and again across different regions and across borders.
From a business and competitive positioning standpoint, PayPal's brand recognition and robust, safe, and proven Payments Platform is attractive to many. Existing users are likely to stay on a platform of growing importance, and new users will continue to be attracted as the company expands everywhere.
Strong Balance Sheet
The digital payments sphere is flush with new ventures, many not currently profitable. PayPal, however, is a massive financial behemoth and industry veteran with profitable operations and financial flexibility. With flexibility comes loads of optionality.
PayPal gushes tons of free cash flow while having maintained a net cash position on its balance sheet for many years. After capital expenditures and research & development, PayPal still has tons of cash left over each year to exercise optionality. This could be additional research & development, expanding into new countries, purchasing assets or new businesses, or returning cash to shareholders through buybacks.
Over the last five years, PayPal has been engaging in all of these activities. We expect PayPal to continue to have the strength to do so.
Through 2025, the BNPL market is expected to grow at a CAGR of 13% to reach a total market size of almost $700 billion. We think PayPal has unique positioning to take full advantage of this trend and expand its TPV substantially. According to PayPal, 68% of millennial and Gen Z shoppers have used PayPal versus less than 10% across the company's three largest BNPL competitors. We believe this reconciles with the fact that PayPal has an established and trusted relationship with hundreds of millions of consumers and merchants.
On the monetization front, all TPV would have an applied take rate of around 3% for all transactions. While consumers do not pay to use it, merchants pay the standard fees to process payments. As BNPL gains popularity, PayPal will probably see the long-declining take-rate trend reverse upwards.
Besides BNPL, PayPal has its eyes on a $110 trillion total addressable market ("TAM") in digital payments. We see a few potential opportunities for PayPal to grow within this market, organically and inorganically:
Expand around the world and grow the ecosystem. As more merchants and consumers adopt the platform, PayPal can become the intuitive payments platform of choice for many more.
Tap into new markets, like government payments, business-to-business payments, and any emerging or future payments solutions.
Partner with, or acquire small fintechs that tap any of the growth areas above or enhance current offerings.
One issue that many face is PayPal's long freeze periods when the company suspects a security or fraud risk with an account. PayPal's freeze periods are generally quite lengthy, with a minimum of 21 days but up 180 days if a lengthy investigation takes place. There have been many instances when PayPal froze an account prematurely, leaving customers with no access to their account and money. If this issue persists or gets worse, it may dampen overall consumer sentiment.
The largest risk moving forward is competition. Stripe is an API-first payment processor gaining a significant amount of market share. Developers can simply cut and paste a snippet of code to have Stripe payments set up. It is that easy.
Stripe has been touted as the better-suited platform for large merchants while PayPal appeals to smaller businesses. Stripe has plenty of developer options and third-party integrations that PayPal does not quite have.
Although the easy-to-use PayPal platform is attractive, larger merchants may want the enhanced customization that comes with Stripe.
Besides Stripe, the fintech industry is quickly growing with many emerging players. Although PayPal has the balance sheet to make many acquisitions and partnerships happen, it is possible a new technology company can upend PayPal's competitive position.
Similarly, it is possible PayPal misidentifies a fintech consolidation opportunity or executes an acquisition poorly that destroys its main strategic momentum.
Unlike other leading fintech companies, like Visa or MasterCard, PayPal holds several billion dollars worth of consumer and merchant revolving and installment loans. With the rise of BNPL, we expect the amount of credit PayPal will be exposed to will continue to rise.
The credit risk associated with this bank-like business exposes PayPal to bank-like business cycles. Closer to, and during recessions, PayPal may experience substantial credit losses, especially if its loan base contains high numbers of customers with low credit scores.
Over 95% of PayPal's loans have been outstanding for fewer than 30 days. We don't see any specific risk today, however, this is a factor to be mindful of in the future as an investor.