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    Stock Market - Fundamental Analysis Article: Paypal Corp $PYPL

    February 07, 2018

    Stock Market - Fundamental Analysis Article: Paypal Corp $PYPL

    Fundamental Analysis Article: Paypal Corp $PYPL

    Posted: 07 Feb 2018 12:38 PM PST

    Paypal

    Hello /r/stockmarket!

    This is the next write-up in my addition to this subreddit. This is my own analysis, done through fundamentals and discounted cash flow to determine the net present value of companies, as well as the overall trend of their respective industry. I've already done Square inc. ($SQ) and Lending Tree ($TREE), and now continue with my favorite sector, financial technology (fintech). As always, if you would like a copy of my financial model, please message me! I'll answer any questions right here.

    Paypal is a company that works with payments solutions and the transfer of currency (non-crypto), for both businesses and private individuals. Paypal make their revenue from both a steady and % fee on each transaction that they process. The current value of Paypal is 91 billion USD, a quite steep price for a company such as this (a trailing P/E of 51). Paypal has also both started and acquired a basket of payment services, each focusing on different type of transactions.

    To name a few:

    Braintree payments, a one stop shop online merchant system. Venmo, a peer-2-peer mobile payment system Paydiant, a seamless mobile payment system for businesses. Walmart uses paydiant in their digital systems. Xoom, a remittance company, focusing on far-distance transfers over long distances for emerging markets Modest, a simple payment system for online merchant with focus on ease of implementation

    As you can see, they have a clear focus but claim a strong brand within their sector, fintech payments.

    ** Fundamentals**
    Paypal generated 3,7 billion dollars of revenue last quarter, with an average revenue growth of roughly 20% y/y in the last 4 quarters. They have an operating margin around 15-16%, and a net margin of 12-13%. These low margins are very common for payment solution companies, as they handle a huge amount of capital. Speaking of capital, the total payment volume (TPV) is the driving earnings generator for the company is at 131 billion USD, and is increasing 20-30% y/y in the last 5 quarters. Keep in mind that the TPV growth is increasing quarter to quarter. TPV growth is really what drives the business, and the TPV growth and revenue growth has a roughly 76% correlation, where TPV increases a bit faster than the revenue itself. Paypal as of today pays roughly 18% effective tax, making them incredibly efficient turning volume into net profit. It is also worth pointing out that Paypal is debtless, and is 5.4 billion net positive cash in their warchest.

    Ebay & War on cash
    Paypal is currently down for this year, after they were announced to be dropped from Ebay as the primary payment service, since Ebay want to collect payment fees themselves. This caused a rough 10% drop in the price of Paypal. It is currently very uncertain how much this hurts Paypal, as Ebay payment volume is today 13% of Paypal's TPV. On top of this, something known as the war on cash is going on all over the world right now. If you are not aware of this, for sure do your research if you are interested in payment technology. Right now a majority of the worlds transactions happen through cash, but the % of cash transactions compared to the % digital payment transactions is currently is shrinking, fast. This translates to every single payment company's market is growing, daily.

    Estimates & Result
    So following the guidance put down by Paypal in their last ER gives 2018 an TPV growth of 20%, as well as a revenue of 15.000-15.250 billion USD, as well as their past performance, while maintaining margins, we are expected to see an increase in profits with an EPS going from 1.33 in 2017 to 1.6 in 2018. In my usual processes, I try to be conservative. I attempt to capture a conservative scenario that is very likely, and do not expect anything amazing to happen (optimism is not better than realism in the market). I usually see what a company is valued at assuming the company peaked in the last quarter reported. Assuming that their own guidance is correct for 2018, and that slowly their growth will go down after peaking in 2018, their net present value ends up at 82 billion USD, which is 12% less than their current market cap at 91.2 billion USD. This would put Paypal into overpriced ranged. However, there are some interesting things around here. As Paypal's market (the payment market) grows rapidly, there is tons of potential that is hard to calculate fundamentally. If the entire market grows to its full size, which would be roughly by 2/3rds, and Paypal takes a portion of that market share, their growth rate would increase rapidly. A sign of this is their increasing growth in TPV. The model which assumes peak in 2018 leaves their net present stock value at 69.4 USD, a 9% downside to its current valuation. The more optimistic model, which I also find more realistic, is where Paypal have at least 2 more years of growth until they peak. In this scenario they maintain their revenue growth of 17, until 2021, while maintaining margins. After that peak, slowly decline by 2% per year, with a discount rate of 7% (fair I'd say), their net present stock value is at 96 USD, 27% upside.

    Conclusion
    Paypal is a very tough company to evaluate, one of the hardest I've ever analyzed. They are a growth company for sure, but a very expensive one. They are priced at a point where they keep growing without many issues. If you assume peak in 2018, they are overvalued, 20% so pre "correction", and 9% now. However, assuming payment solution growth companies peaking this year is practically assuming the company's failure. There is not success without additional growth. There is for sure risk there, especially with events like Ebay dropping them (note, it was not unexpected, but bad nonetheless). It's hard to estimate how much it damages them, if at all, and if similar things will happen when competition with lower prices arise. However, all this said there is so much to like. A debtless company that is top of their respective field R&D-wise, making great profits (even if you are paying quite a bit for that profit at trailing PE of 51). As the digital payment volume increases, paypal will gain a portion of that, which makes Paypal a stable purchase if you want to bet against cash (which is smart). The questions to look out after are for sure:

    How does paypal maintain their Revenue to TPV ratio? This number is crucial as they most likely will increase their TPV. One problem might be that they have to lower their fees to compete in the future. How does the competition look? The world if filled with competition, and its truly fierce here. Any provider that is cheaper/as cheap and/or easier/as easy, will out-compete Paypal rapidly. Where is the expected revenue peak? If you assume it 2018 it looks pretty bad, if you assume it later it start looking good fast.

    If we see an increase in guidance as well as results in 2018-2019, it will be good enough news to maintain the goal of not peaking before 2020, which would make paypal a 26% upside purchase today.

    My take:
    I believe in Paypal, however I much more strongly believe in the profitability of the war on cash. I think that if you are not invested in the "war" you are making a huge mistake.

    Good places to be include: $V (Visa inc), $PYPL (Paypal) and $MA (Mastercard)$.

    I currently own Paypal, it is currently just below 10% of my portfolio. I am down 10% after their earnings and Ebay announcement. The earnings looked better than I expected, and I am very pleased. I plan to average down to roughly 15% of my portfolio, and hold very long term until I can reap the benefits of the transition to a cashless world. I would buy Visa over Paypal, as it comes with less risk. I will make a write-up on them next. I own both, the same amount.

    Thanks for reading!

    /u/lykosen11

    submitted by /u/lykosen11
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    In times of uncertainty, be certain.

    Posted: 07 Feb 2018 06:02 AM PST

    Hello /r/Stockmarket

    This is a very interesting time in the markets, and after a very extended bullrun, we have found us in a situation of a first correction, if you want to call it that. Some people might have felt their first fear during what happened here, and even if these points are said over and over everywhere, it bares repeating. As a very heavy fundamentals investor, I want to plug my own view on the situation.

    There are many different ways of making financial investments. You can look at chart and technical indicators or you can look at trends and news. Or you can pick one of the many thousand ways to try to "guess" what the market will do in the future. Problem is, that tons of information is unreliable. You hear someone say something online, and you believe it. Maybe amazon is more expensive than apple because the individual shares costs more. Maybe you are told that all stocks @80 USD is worth 120 USD because of psychology. Perhaps you saw a chart that predicts the future using tons of lines you do not understand. I want to make this very clear. If you want to find a way to profit and learning you need one thing and one thing only.

    You need a plan.

    You need a strategy that will hold up. You can not be unsure about this plan. And this is something I preach CONSTANTLY. There is nothing stressful about the investing market, as long as you firmly believe in your own beliefs. If you evaluate $SQ to be worth $46, buy it at $40, and it drops to $30, you just lost 25% of your investment. Stressed? Well, you should not be. It's about belief. The only reason you would be stressed if you doubt the reason you bought it. That is why absolute belief will remove all psyche issues with investing, and why it is so important to pick what you choose to put your belief in.

    I put my belief in fundamental analysis. It is the only thing I believe in. While technical analysis and trends are something that most definitely works to some extent, if the market drops, your trend or technical indicators stop mattering. Fundamentals is the only thing that do not change as the price of the company drops. And therefore I, among many other people, trust what you actually buys. If you buy a new laptop, you don't care about how the price change over time. It only matters what you are actually buying, how strong, fast or heavy the laptop is. Feel free to disagree, everyone should have their own belief. But once you picked your belief, it must be absolute, and it must be the correct way to see things.

    Before you buy a stock, always:

    Why am I getting this instead of an index?

    Where is the upside?

    If the stock goes up, what action do I take?

    When do I sell? At what price or % gain. What action do I take?

    If the stock goes down, when do I sell? At what % loss or a price. What action do I take?

    What risks are there?

    How does the worst case realistic scenario look like?

    Why am I making this investment right now? Is there a better time?

    What exactly am I buying?

    If you can't answer these questions for every single equity, security or paper you own, you have failed. I choose fundamental analysis as my weapon, and I am absolute. Are you?

    /u/lykosen11

    submitted by /u/lykosen11
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    Can anyone show me a current example of an inverted head & shoulders pattern?

    Posted: 07 Feb 2018 08:12 PM PST

    Are you invested more in an S&P 500 Index or a Total US Index? And why?

    Posted: 07 Feb 2018 07:26 PM PST

    ETF vs. Stock

    Posted: 07 Feb 2018 07:19 PM PST

    Hey everyone,

    I really want to start investing in ETFs, I was thinking maybe like IYW , MJX, and XLI, That way I have tech, marijuana, and industrial ( want to stay diverse )

    Should I still buy solo stock in companies that are in those ETFs or only have stock in those through the ETF?

    submitted by /u/wait_WutWut87
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    Deat Cat Bounce or Bottom?

    Posted: 07 Feb 2018 06:50 AM PST

    Looks like Dead Cat Bounce to me.

    submitted by /u/borandos
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    Thoughts on STZ

    Posted: 07 Feb 2018 11:53 AM PST

    I have currently been looking at STZ. It is consistent and has great brands under it as well as recently getting into the weed sector a little. However, I've also heard of fed allegations? I was wondering what others thought about this stock to hold long.

    submitted by /u/moneta7
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    What do y’all think about Tesla?

    Posted: 07 Feb 2018 05:38 PM PST

    First Trillion dollar company because of profit from owning a fucking planet, or an overvalued piece of shit aka Elon Musk is a con artist who swindles peoples money and always shits on earnings?

    Let me know

    submitted by /u/ATL_LAX
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    Feb-08-2018: Market Recap and Next Day Review

    Posted: 07 Feb 2018 04:54 PM PST

    https://youtu.be/FlPLVQLX2zk

    With another rollercoaster day on the markets, we continue to assess the bull case to determine if we are going to see a potential short-term change in trend. With volatility at multi-year highs, many professional traders are waiting for confirmation to get the "all-clear" before jumping back in. In this market, it's better to "confirm and be late" than to "front-run and be wrong." Is the worst behind us? We answer this and more in tonight's video.

    $SPX $DJIA $NDX $RUT $BKX $DJT $GOLD $OIL $SPY $QQQ $IWM $FAS $FAZ $GLD $GDX $USO $UNG $BTCUSD $GBTC $TLT $USDX $DXY

    submitted by /u/TraderLion
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    Beginner Stock Pricing Strategy? Phil Town?

    Posted: 07 Feb 2018 04:39 PM PST

    I read the Phil Town book 'Rule One'. His basic strategy for pricing stocks breaks down like this...

    Phil Town - Rule One

    Wondering if anyone else is familiar with this strategy and how reliable it is. It almost seems too easy. Or if anyone has any recommendations on where I can learn some noob stock pricing strategies? Thanks.

    submitted by /u/chrisR1986
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    Just as there are flash crashes, are there ever flash increases in market-wide prices?

    Posted: 07 Feb 2018 04:31 PM PST

    Newb here. I keep reading about how algorithmic trading has increased the risk and incidence of flash crashes. Does the same thing work in the opposite direction? Does algorithmic trading ever contribute to temporary rapid rises in market prices?

    submitted by /u/RosmarysBabyBjorn
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    Need help understanding impacts of interest rate on yield rates

    Posted: 07 Feb 2018 04:04 PM PST

    I have trouble understanding a passage in this article:

    If you see that the 2-year [treasury note yield] is higher than the 10-year [treasury note yield], the expectation is that interest rates are lower in the future

    I am not 100% clear on how happens.

    From what I understand,

    • Yield is ratio of bond's payment to price.
    • Bond yield decreases if bond price increases.
    • Bond price increases if there is more demand for it.
    • Bond yield decreases if there is more demand for it.
    • If 10 year note has lower yield than 2 year note, the 10 year note has a higher demand than the 2 year note.

    To me the article's passage would suggest that in the face of lower interest rates, people would prefer long term bonds (prefer 10 over 2 years). But why is this? Is it because we can 'lock in' the payments for a longer time?

    I apologize if this is a simple question. Let me know if there is a paper or resource that can give me a better understanding. Or if there is a more appropriate subreddit.

    submitted by /u/depiloda
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    Besides driver-less cars (which won't be profitable for at least a few years from today), what does GOOG have going for it? Is it a good investment?

    Posted: 07 Feb 2018 03:57 PM PST

    Thanks for any feedback.

    submitted by /u/explore__
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    Best stock evaluation platform?

    Posted: 07 Feb 2018 11:37 AM PST

    Hello all,

    I am looking to research stocks and would appreciate some help in finding the best platform to analyze before purchase.

    Thanks in advance!

    submitted by /u/terrancedavius
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    (2/7) - Wednesday's Pre-Market Stock Movers & News

    Posted: 07 Feb 2018 05:36 AM PST

    The Zigmont Report (Daily Market Recap for 2/7/18)

    Posted: 07 Feb 2018 01:42 PM PST

    Settling down. Equities calmed down finally. There's still tension out there but the bulls and the bears aren't running over each other. Depending on the moment of the day, one camp moved the tape 20ish handles in their favor and then the other camp pushed things back....

    http://finteknews.com/zigmont-report-daily-market-recap-2-7-18/

    submitted by /u/nippertaylor
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    Why don't ppl buy stocks for the reason "ppl will start valuing this company more" as opposed to underlying company fundamentals?

    Posted: 07 Feb 2018 01:11 PM PST

    What sources or tools are novice do-it-yourself investors using?

    Posted: 07 Feb 2018 08:36 AM PST

    $AMAT or $STM

    Posted: 07 Feb 2018 08:23 AM PST

    So, which one do you go with long term?

    Stm pays a better dividend and seems to follow the amat chart exactly with a few dips sprinkled in. (I see those as extra buying opportunities, and earning potential). That being said. The company is half the size of amat and amat has a looot going for them.

    Please keep focus to which one and why and not about 'why these 2' type questions.

    Thanks

    submitted by /u/Nips27
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    NVDA good buy before earnings call?

    Posted: 07 Feb 2018 08:10 AM PST

    New trader here. Do you guys think its a good idea? I don't see how they can't beat expectation when they can't keep their product on the shelves and car manufacturers are switching over to nvidia chips for their infotainment systems.

    Thoughts?

    submitted by /u/Vindiesel_420
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    Chart patterns and candle stick formation

    Posted: 07 Feb 2018 02:48 AM PST

    Hi guys may i ask regarding chart patterns and candle stick formation? How can these help you when it comes to your technical analysis? Becuase as i read books regarding these topics they usually just describe the formation when it comes to candle sticks formation. They say its bullish or bearish but i still find lacking.

    As for chart formations they are are more informative to help you decide about your position. What to do if its a cup with handle formation or triangle formation. But how can you take these info to the next level?

    Thanks

    submitted by /u/kagi52
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