Paypal – despite –80%, I think it can fall another 50%

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PayPal’s stock was without a doubt one of the highfliers during the 2020–2021 tech mania. At its top, PayPal was valued at around 15x sales, having a market cap of more than 350 bn. USD, despite only 6 bn. USD in free cash flow. Not so surprisingly, the stock came back from this unsustainable level, though many likely didn’t expect to see less than 15x earnings after a drop of 80%. Time for a turnaround? I think this is still a strong value trap, good enough to fall another 50%.

Summary and key takeaways from today’s Weekly
– PayPal is seen as a clear turnaround story after being down 80% now by many who have already bought many painful dips.
– However, there are good reasons why PayPal has seen its peak and is even at risk to decline further.
– Its business seems to have more problems than is discussed.

I am fully aware that this statement seems very bold and courageous at this time.

After being down already by 80% from its peak, the stock of PayPal (ISIN: US70450Y1038, Ticker: PYPL) is a hotly discussed target. However, most of the calls are bullish, spotting an almost no-brainer for a successful turnaround.

Arguments are made around PayPal’s leading market position, its strong profitability, e-commerce being a structural driver that has just started, buybacks, a new CEO, you name it.

The problem is, they have been seeing and saying it this way (with the exception of the new CEO who is relatively new) since the stock dropped from its high above 300 USD a piece to first 200 USD, then 100 USD, then 80 USD and so forth. Now, being in the 50s, it is said to be the buying opportunity of a lifetime.

Such “analysis” should be viewed cautiously, though. It’s more praying and hoping.

What I can tell due to observations is that when everybody thinks it is a turnaround or even better a proclaimed safe bet, then it most likely isn’t. I estimate that there are many people deep under water, hoping for a reversal. Obviously, this involves lots of emotions that should be put aside when discussing investments.

Not only is sentiment and social media activity around PayPal still too good and frequent. My analysis, trying to be as unbiased as I can, unfortunately does not allow for a bullish assessment.

Yet, not even a neutral one, as something does not smell right.

source: Tumisu on Pixabay

It is not about me wanting to be contrarian at all costs.

If a lucrative opportunity arises and passes my strict filter, I do not hesitate to write a research report about it for my members. But I have to be fully convinced, not just a bit. Or the other way around: If there’s some doubt and it’s not a clear “yes”, it is a clear “no”. And certainly do I not just share opinions that many other minds have. The likelihood for a great call decreases.

Over the last years, I had a relatively good nose for value traps, including Bayer (ISIN: DE000BAY0017, Ticker: BAYN), 3M (ISIN: US88579Y1010, Ticker: MMM), REITs, tobacco, consumer staples, German automotives, big Pharma, which spontaneously come to my mind. Many of those stocks have been spotted as either great turnarounds or must-have dividend stocks.

Of my now 20 research reports, just two ideas are down by more than 15% (one of it is closed now – I have been wrong). On the other side, seven ideas are up by at least 20% and five even more than 30% (one closed).

With this risks-first approach, I am also missing one or the other opportunity, that’s for sure. But what I clearly want to avoid is picking the garbage as it not only drags on the performance. It also drags on one’s nerves and attention.

Despite headline numbers looking okay and at least not having disappointed, the outlook for PayPal is weak. If one takes a few minutes more to look at the numbers in greater detail and not just at adjusted figures or non-GAAP EPS, it is impossible for me to overlook certain negative developments.

The risks are way too high!

I don’t care whether the stock is “cheap” at a PE of 30x, then 20x or now even in the low- to middle-teens. This is at best amateurish, at worst ignorant.

The average total return of my active stock ideas is +17.3%, beating the S&P500 and the iShares MSCI World ETF.

as per 14 February 2024 market close – since August 2022

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Why PayPal continues to be a value trap

The weakest arguments are obviously tied to so-called price-anchoring.

In short, this means that you are mentally fixated to a higher price the stock had in the past and compare today’s lower price to the formerly higher one. If it was a bargain before, it must certainly be the same now, even more so. Or, even worse, you start hoping to flip your unrealized loss into a gain or at least a zero.

It has been there already!

Because a stock has been at exuberant highs, does neither mean that a stock is undervalued now at lower prices, nor does it mean that it will ever reach them again. A stock can even be risker and more expensive at lower levels, however, this does not apply to PayPal. Without a doubt, it’s cheaper than before. But for a reason as there are new risks which make it for me uninvestable.

While it is true, though, that after an exaggeration in one direction there often follows one to the opposite, who says that we are there, yet?

Today, PayPal’s stock is on levels in has been in 2017. This is more than just a correction of the prior exaggeration of the early 2020s.

However, I don’t think it is already the “exaggeration to the opposite” I’d like to see.

source: Seeking Alpha (see here)

As said, I don’t like stock ideas where there is practically only consensus in one direction, especially not if it is heavily bullish. Just flip through Twitter / X or YouTube.

It is wise, not to get caught into the “cheap valuation” camp.

There’s lots of static observations instead of discussing the underlying dynamics and doing a more profound analysis, including developments over a longer term, discussing outlooks and also thinking slightly outside the box.

A PE ratio of 11x or 15x or whatever on a standalone basis does tell you – absolutely nothing! You don’t know anything about the outlook, growth prospects, the development of margins or also the competitive environment. Just looking at a PE ratio and calling a stock cheap … – no, I’m not finishing this sentence.

Lo and behold, I am far from having mastered this myself.

After having put many pieces together, if there’s still not a high conviction, but sentiment is bullish, it’s better to stay on the sidelines. Also, I learned over the last years to listen more to my gut feeling.

This is how value traps likely can be distinguished from truly interesting turnaround candidates: When everyone’s calling it a turnaround, forget it.

The above applies even more so if the callers have already been bullish at way higher prices.

A first indication that PayPal isn’t finished yet, was the reaction of its stock to the released earnings announcement. The stock got hit by another 10%, despite having been “cheap” already. Simply assuming here the market is being irrational for some strange reason is foolish.

The core problem was not even the results itself, but more the outlook.

Important numbers like sales, operating earnings, earnings per share reached new highs. Not that great of a deal was free cash flow, but the explanation was due to one-time effects. Whether that’s it or not, is not even that important because there are certain other figures developing in the wrong direction.

For example, the payments industry is an asset-light and thus supposed to be scalable and high-margin business. In the case of PayPal, I do not see this.

source: TIKR

One could say that free cash flow margins have risen.

As I am a big proponent of looking at cash generation and FCF, this makes sense. But PayPal pays hefty stock-based compensations which are subtracted in the P&L statement as costs, but added back to cash flows. While it is true that at this point in time no cash flows out of the business, it is also true that SBC dilute shareholders, thus there’s a form of an economic damage to shareholders.

That’s why I like to subtract SBC to determine the “true” FCF.

While in 2014, SBC were only 13% of operating cash flows, last year this number increased to 30%. This better shall not be ignored. That’s a lot!

I’ll come back to this point later again.

source: TIKR

To finish my margin argument, PYPL’s transaction margin has been in decline for years now. They get less out of every transaction, despite having increased fees.

source: PayPal FY 2020 results announcement (see here)
source: PayPal FY 2021 results announcement (see here)
source: PayPal FY 2023 results announcement (see here)

I have difficulties in calling this a strong development.

Ten percentage points down is hardly a great achievement, but more a sign of fierce competition and not necessarily a wide moat.

Someone on Twitter posted a chart dealing with the take rate of PayPal which points in the same direction. The take rate describes what share of the whole transaction it receives as a fee.

Just compare it to Visa’s (ISIN: US92826C8394, Ticker: V) take rate, respectively the direction it is trending.

source: Twitter / X (see here)

PayPal is said to have a market share in online payment processing of 40–45%. Statista says 40%, others slightly more (see here). This source here has seen PayPal at over 54% even in 2021.

There is pressure under the hood and PayPal seems losing.

source: Statista (see here)

While it is true that PayPal is a comfortable solution, especially if you like me don’t like to create a new customer account on every site (more so if you only want to shop once there), PayPal has been really advantageous to use. Also, with its first-mover advantage, there’s still lots of credit on its side.

But it is not a given that it’ll last forever.

For credit card payments, stripe has been strongly on the rise. I can tell from personal experience on my blog, I ditched PayPal after having had issues with them. stripe works flawlessly. I asked a blogger colleague and he said the same, though he still keeps PayPal.

Please take in account also other solutions that are on the rise like Shopify’s solution, amazon pay or ApplePay. Likely you will have seen more and more sites offering these solutions.

Two other things from my perspective are underestimated and threatening PayPal.

First, user growth. While I wouldn’t over-interpret the current decrease in total active user’s as management focussed on deleting fake accounts which is plausible, the fact that they do not grow users is the real issue.

How can you have a fully intact growth story when there’s a lack of more users joining?

Note: blue = total active users, black = growth rate

source: Statista (see here)

Total active user’s now are somewhere where they’ve been in 2021.

It does look more like a topping out of active users, even though I sincerely think that there is something to it that fake accounts over-exaggerated numbers in the past.

My second point is that PayPal, although being clearly an internet or online solution, is more a desktop solution than a truly mobile experience. While of course it does have an app, have you seen anyone paying with PayPal in the supermarket? Or do they use cash, credit / debit cards or something like Apple Pay instead?

This is something I haven’t read in other analyses.

Younger people continue to prefer in growing amounts using their smartphones and / or smartwatches to pay. Also, online shopping among the younger demographics is tilting more towards mobile.

Even though PayPal’s new CEO promised to optimize the online shopping, respectively payments experience by cutting checkout times by 50%, this is a serious new competitive environment.

Apple is said to have a market share of almost 50% in this rapidly growing area.

source: pymnts (see here)

This is still a niche, but this is likely the future.

You can read more about this development and a study here, where the authors say that PayPal is more frequently used among the older generations.

What I would not over-estimate at the moment are payment volumes and sales, because we’re in an inflationary environment, respectively have been over the last years. And as everyone knows, everyday prices have risen more than the proclaimed inflation rates so that the growth dynamics here are lower in reality.

And now back again to the topic of free cash flows and stock-based compensation.

PayPal is bragging about repurchasing shares aggressively and this is also an argument many PayPal bulls are making. But have a look please first at these charts.

source: TIKR

You can see that in 2021 they aggressively repurchased shares at the top at insane valuation multiples of 15x sales and over 50x earnings.

Then in 2022 all the way down again.

In 2023 the same.

It is debatable whether now we’ve reached a valuation where it makes absolutely sense. But prior, it was a waste of shareholder’s money.

But there’s a catch.

Remember SBC? 30% of operating cash flows is stock-based compensation, in other words, cash flows are overstated. Not from an accounting rule perspective, but from the perspective of a shareholder.

During 2023, PayPal had an average share price of somewhere between 60–70 USD. This translates into a market cap of 70–80 bn. USD. All are rough figures measured by eye. So, 5 bn. in conducted buybacks should have shrank share count by 6–7%, right?

Not really.

source: PayPal Q4 2023 earnings presentation (see here)

From 2022 over 2023, share out shrank by 4.5%. In the year before even only by 2.4%.

Ten billion USD for less than 7% in shares outstanding. That’s hardly a deal, as a good chunk was used to offset dilution from SBC.

I pretty much dislike such high SBC. In the P&L you can see them as earnings are depressed. In the cash flow statement miraculously, they are get added back to cash flows, even though clearly hurting shareholders, because in practice they either have to accept dilution or their money is used to offset this dilution, not benefitting them.

source: PayPal annual report 2023 (see here)

Why is this so problematic from another perspective?

When we look at the “true” valuation, it becomes apparent.

While bulls claim to have found an 11x PE bargain, the truth is, subtracting SBC from free cash flow numbers, we arrive at only about 2.8 bn. USD for 2023 and 3.8 bn. USD for 2022.

Comparing this to an enterprise value of currently 62 bn. USD (net cash already subtracted), the valuation multiple is somewhere around 16–22x.

That’s about double the perceived multiple in the worst case.

From a different perspective, PayPal spent 5 bn. USD for buybacks in 2023. In 2024, they want to at least spent the same amount and aim to generate 5 bn. USD in free cash flow (though, including SBC). So effectively, the shareholder yield is somewhere around 4–5% as they intent to use the whole free cash flow.

The catch is now, management does not expect any growth for 2024.

source: PayPal earnings announcement 2023 (see here)

And this shall be a good deal and a great turnaround story?

A yield of 5% without growth? Adding what I wrote above, it does not really seem that this case will return to growth again. To the contrary, they should rather be happy not losing even more to the competition.

If you’re asking me, this is not a favorable low-downside, high-upside case.

Especially not for an 16–22x valuation multiple that is still including a growth premium. No-growth companies trade for 10x or even less. Before we discuss any potential turnaround, I’d first like to see many optimists capitulating and also at least a stabilization in the business.

A clear pass.


PayPal is seen as a clear turnaround story after being down 80% now by many who have already bought many painful dips.

However, there are good reasons why PayPal has seen its peak and is even at risk to decline further.

Its business seems to have more problems than is discussed.

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