PayPal After Q4 2017: The Easy Money Has Been Made

  • A discount rate of 6% during the next 5 years.
  • FCF annual growth of 15.2% during the next 5 years.
  • A 20 multiple on 2022 adjusted FCF.
  • Distributable adjusted FCF (net of SBC) of $2.35 billion in 2017.
  • $7.7 billion in excess cash and cash equivalents as of January 2018.

Takeaways, recommendation and future coverage

Are the assumptions backed in PayPal stock price of mid $70s realistic?

In our opinion, they are not out of touch with reality. In fact, they leave some room for future price appreciation once the effects of the eBay breakup are digested. The annual growth rate of 15.2% and the 20x FCF multiple may prove too conservative. And as said, there is enough TAM for many decades of growth.

But the assumptions don't leave much room for a margin of safety either. A faster than expected interest rates ramp, for instance, could render the 6% discount rate and even the 20 multiple, too optimistic.

And the narrative could turn even nastier as Apple, Google and Samsung Pay make inroads in mobile payments. While the potential effect of competition from these three giants is presently out of the conversation, we suspect that there will come a day when a PayPal earnings conference call Q&A session will be all about the switch of iPhone and Mac users from PayPal to Apple Pay for their mobile and online payments. After all, the integration of PayPal platform into an Apple product will never be as seamless as that of Apple Pay. And there is nothing that PayPal can do about that. So reader beware.

This is not a relinquishment to the long investment thesis. It is just an attempt to moderate expectations.

To sum up: the easy money has been made.

PayPal is not expensive relative to the broad US stock market. But the US stock market is expensive by historical standards.

Our recommendation is for long investors to maintain their position.

Investors without stakes in the company may consider initiating a long position, but we believe there are more compelling opportunities in the market.

If you have enjoyed the read, Subscribe to notifications. We will update our thesis after the Q1 earnings conference call in May. In the meantime, we will keep publishing research on potential stock picks and other positions in our portfolio.

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Disclosure: I am/we are long PYPL, AAPL.

Additional disclosure: I/we may reduce the PYPL long position over the coming months.

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Comments

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Alpha Stockman 3 years ago Member's comment

This is a highly competitive space. I wouldn't have bet on PayPal years back but they proved me wrong and continue to impress.

Investment Works 3 years ago Author's comment

If you have enjoy the read >> FOLLOW US << on TalkMarkets so that you don’t miss any future research on $PYPL.

Joe Black 3 years ago Member's comment

Why did #Ebay abandon #PayPal and who the heck is #Ayden? I never heard of them but would love to know the story of what the catalyst for such a monumental change was.

Paul McGee 3 years ago Member's comment

This is a solid company which still has a promising future. Buy the dips.

Barry Hochhauser 3 years ago Member's comment

Plenty of opportunities left for PayPal's international growth.

Currency Trader 3 years ago Member's comment

As I wrote earlier today here:

"PayPal Stock Crashes: Buying Opportunity Or Time To Panic? "

www.talkmarkets.com/.../paypal-stock-crashes-buying-opportunity-or-time-to-panic

While I agree that $PYPL will likely rebound in the short-term, in the long-term old-school companies like PYPL will go the way of the dinosaurs and be completely replaced with true digital currencies.

Investment Works 3 years ago Author's comment

As a payment system, what practical advantages do cryptocurrencies have over PayPal? The only one we're aware of: payment anonymity, which is only of use in connection to illegal activities and therefore has no impact on $PYPL market.

Michele Grant 3 years ago Member's comment

I disagree, as I've argued many times in the past (check my hashtags for #bitcoin and #crptocurrency), the digital currencies you are referring to are incredibly volatile, completely unregulated, uninsured, are a haven for criminals and are an increasingly tantalizing target for hackers.

A proven and trustworthy company like #PayPal is the perfect middle grown for investors who want to follow the future of payments, but want safety and stability as well. Very bullish on $PYPL.

Flat Broke 3 years ago Member's comment

#eBay dropped #PayPal for #Ayden. That's going to severaly hurt PayPal. Who knows how much longer they'll be around? Between the disolution of their longstanding partnership with ebay, and increased competition from traditional credit cards and the new wave of cryptocurrencies, I'd say $PYPL's days are numbered.

Harry Goldstein 3 years ago Member's comment

That's not quite correct @[Flat Broke](user:29387), the two companies will remain partners through July 2020. It won't hurt PayPal anytime soon and gives them plenty of time to recoup those losses.

Not to mention it's been quite a long time since Ebay was their primary revenue source.

Michele Grant 3 years ago Member's comment

Actually, if you read the article, you'll see that credit cards are partnered with PayPal, not just competing with them. And I've already explained why I think #cryptos are not a threat. They will fail long before $PYPL.

Charles Howard 3 years ago Member's comment

Good stuff.