We came across a bullish thesis on PayPal Holdings, Inc. (PYPL) on Substack by BlackSwan Investor. In this article, we will summarize the bulls' thesis on PYPL. PayPal Holdings, Inc. (PYPL)'s share was trading at $89.11 as of Jan 24. PYPL's trailing and forward P/E were 21.32 and 18.12 respectively according to Yahoo Finance.
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PayPal Holdings, a fintech pioneer since 1998, has revolutionized digital payments and remains a cornerstone of online transactions. Following a challenging period in 2023 amid growing competition and market maturity, the company embarked on a transformative turnaround under CEO Alex Chriss, who took the helm in September 2023. Chriss's focus on profitability and operational efficiency over sheer top-line growth has begun to deliver results, with steady revenue growth, reduced expenses, and stronger free cash flow generation. As PayPal enters 2025, its strategic initiatives and untapped opportunities position it for sustainable success in the evolving fintech landscape.
PayPal's core business, which generates about 90% of its revenue from transaction fees on payment processing, cross-border transactions, and Venmo peer-to-peer transfers, remains its foundation. The remaining 10% comes from value-added services, including subscription fees, lending products, and referral commissions. A key growth catalyst is PayPal Ads, launched in October 2024, which leverages its massive user base of 432 million active accounts and rich consumer data for targeted advertising. With Mark Grether, the architect of Uber's $1 billion annual ad business, leading this initiative, PayPal Ads is poised to tap into a high-margin, expansive market. The advertising segment could emerge as a transformative driver, benefiting from higher margins and a broader market than the core payments business.
Under Chriss's leadership, PayPal has also expanded its competitive edge through initiatives like Fastlane, which targets guest checkout users, and strategic partnerships with e-commerce giants like Amazon and Shopify. These efforts have stabilized growth and enhanced PayPal's market positioning. Although the company faced controversies, such as the 2022 misinformation fine proposal and backlash over the 2024 Honey extension, their long-term impact on operations has been minimal, underscoring PayPal's resilience.
The market has yet to fully recognize the transformative potential of PayPal Ads and its profitability-focused strategy. With $6 billion in projected free cash flow (FCF) for FY2024, supported by ~5-6% revenue growth, PayPal offers a compelling investment opportunity. Shareholder-friendly policies, including aggressive share buybacks totaling $15 billion from 2022 to 2024, have reduced the share count from 1.2 billion in 2018 to 1.0 billion in 2024, further enhancing shareholder value. Despite competitive pressures from players like Apple Pay and Visa, PayPal's improving fundamentals and disciplined approach position it for continued success. A valuation of $113.90 per share reflects a significant upside, offering a favorable risk/reward profile for long-term investors.