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Paypal seems to be a fantastic investment case and brought very high returns in the past. However, there are also some risks associated with their operations, which we are going to discuss today. Let´s see whether an investment into Paypal could pay out well.

Who or What is Paypal?

Paypal operates in the online payments industry. It was founded 1998. From 2002 until 2015, it was part of eBay. It was seperated from eBay in 2015 and since then is seperately listed on the stock exchange.

On the day of the IPO, PayPal was worth 38$ per share. Today, one share is worth more than 270 USD. Imagine you had invested 1,000$ on the first day. Those would be worth more than 7,100$!

Paypal has more than 27,000 employees and has a total market capitalization of 270 billion Euros.

What about the Revenues and Earnings per Share of Paypal?

Paypal had revenues of more than 21.4 billion USD in 2020. This was an year-over-year increase of 20.9%. In addition, Paypal is quite profitable. In 2020, its profit summed up to 4.2 billion USD. This was 75% more compared to the previous period.

Breaking that down to an individual share, the earnings per share were 3.54 USD (also in 2020). Consider, however, that those numbers a volatile. The latest reported numbers were released end of June 2021. In the 12 months before that date, Paypal achieved earnings per share of 4.1 USD. This is an increase of amazing 88% compared to the previous period.

After those high-level numbers, we will take a look at the actual business of Paypal.

What exactly Does Paypal Do? What Business Would you Buy?

Most of you will know Paypal and probably use its services frequently. Paypal enables online payments, as well as sending and receiving money. It does so by providing a virtual bank account. In that context, the email address works as the actual bank account number. Users can transfer money from and to their account.

As of today, more than 330 million people around the world use Paypal.

How Does Paypal make Money?

Setting up the bank account with Paypal and paying with it is for free. However, Paypal gets a small transaction fee from the receiver of a payment (if it is for business purposes). The fees differ from country to country, but are always about 0.5 Euros plus approximately 3% of the transaction volume.

Users can even transfer money to almost every email address. If the owner of the email address does not have Paypal, he or she can create an account and receive the money.

Paypal is predominantly used online. However, they also entered the offline market. For instance, they have cooperations with a German local supermarket, with Shell (also in Germany), and they can be connectd with Google Pay. It seems that they are trying out how to generate more volume from offline payments.

What is the Foundation of Paypal´s Success?

1. Paypal´s business has a huge advantage compared to traditional banks: Its payments are directly executed. Bare in mind, however, that more and more companies can also provide that advantage.
2. A very distinct advantage of Paypal is that they are a market leader in a large and further growing platform market. A platform market is an industry, in which the provided service becomes more valuable to the users, the more users use the service. A very simple example would be a telephone company that allows you to only call people that have the same telephone. A real life example for that would be iPhone´s Facetime.

What Risks are Associated with Paypal Shares?

The biggest risk directly emerges from Paypal´s past. Although Paypal got independent from eBay in 2015, eBay was always a strong partner of Paypal. In 2018, however, eBay announced that the partnership will come to an end by the year 2023.

Instead, they are planning to partner with Paypals competitor Adyen from 2021 onwards. The impact that such an individual decision has on Paypals share price shows the risks that there can be.

Moreover, Paypal´s evaluation is currently extremely high. Naturally, this gives a lot of room for the share price to fall deep.

As mentioned, PayPal is active in a very strong platform industry. The more users use the service, the more interesting it becomes for other users and the more value it generates. The same holds true for the opposite. If a competitor overcomes PayPal, the whole company could relatively fast vanish. Adyen might be such a competitor. If you want to learn more, take a look at the growth history of Adyen.

Taking an objective approach to the risk of a share, we consider the share´s beta. It is an indicator that measures the relative movements (up and down) of a share compared to the overall market. If the indicator is over 1.0, the share is generally more risky than the average market. If the indicator is below 1.0, the share is less risky. This is also called, a “defensive” share.

The Beta of Paypal is about 1.16. This means that the share price is more volatile and hence more risky compared to the overall market. This is also very typical for a technology company as it is PayPal.

What are the Characteristics of Paypal Shares?

First of all, Paypal does not pay any dividends. However, the past development of their share price is really beautiful:

1. Last 3 months: +15%
2. Last 12 months: +43%
3. Last 3 years: +207%

Comparing those numbers with an average market return (here, the MSCI World), underpins how strong that development was:

MSCI World Development in the same period:
1. Last 3 months: +10%
2. Last 12 months: +33%
3. Last 3 years: +49%

Across all measured time periods, Paypal shows a much stronger growth rate than the MSCI World:

• 50% higher growth in the last 3 months
• 30% higher growth in the last 12 months
• 322% higher growth in the last 3 years

What trends are important for the success of Paypal?

Paypal benefits from several payment trends:

1) Purchasing services and products online is still on the rise and those have to be paid. Paypal is very well positioned here

2) Mobile payments are also on the rise and Paypal is taking its share with its mobile app. They also partnered with other players, e.g., with Google Pay.

3) Consumers increasingly prefer low fees and therefore accept less service. In other words, the traditional bank accounts with personal contact, but high fees become outdated.

What´s the Corona impact on Paypal?

Paypal was surely one of the biggest winners from the digitization wave that was caused by Corona. Moving our lifes into the Digital world increased their users, volume, and profits tremendously.

With Corona coming to an end, the growth rate of Paypal will also come back to a normal level. A first warning might have happened end of July. Although the Q2 2021 figures were quite satisfying, the share price dropped by about 15% in a few days. A main reason for that was that the growth is expected to slow down in the future. However, also the fact that eBay will not exclusively partner with Paypal anymore, but prefer Adyen instead, was a main trigger.

Is Paypal a sustainable company?

Paypal puts a focus on sustainability. They publish a global impact report on a yearly basis. The following are highlights from the report

1) They want to achieve net-zero emissions by 2040.

2) They managed to match 98% of the energy consumed by their datacenters with renewable energy. (Emissions from offices are behind that goal)

3) By 2025, the goal is to reduce overall greenhouse gas emissions by 25% compared to 2019.

4) By 2025, they also want 75% of their suppliers to set themselves sustainability targets.

Am I investing in Paypal?

Yes, I am currently invested in Paypal. However, it is not a clear decision whether to invest here or not:

One the one hand, Paypal is strongly positioned in a strongly growing market.

On the other hand, its current market price is quite high and there is a risk that a compeitor will overcome them in the future.

Such a scenario would lead Paypal into a dark future. The question is: How likely is it to happen?