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Paypal Holdings Inc. NDIC – March 5Th, 2020 Scott Elliott & Noah Cha

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Paypal Holdings Inc. NDIC – March 5Th, 2020 Scott Elliott & Noah Cha PayPal Holdings Inc. NDIC – March 5th, 2020 Scott Elliott & Noah Cha Recommendation: BUY Investment Thesis Recommendation: PayPal (NASDAQ: PYPL) may represent significant upside due to its potential for growth within the expanding electronic payments space and likely improvement in the monetization of its developing companies 1 PYPL has a massive TAM and likely will continue to gain share in the fastest growing area of payments • Potential for new marketplaces following expiration of eBay operating agreement • Strategic partnerships and international expansion that drive volume growth • Infrastructure and partners to reduce friction through the development of electronic B2B payment systems 2 High potential for the improved monetization of Venmo 3 Braintree is an underappreciated asset and has extensive potential for growth Price Target: $135.4 Implied Upside: 20.85% 2 Electronic Payment: the Players The Merchant The Technology The Customers Works with merchant acquirer, A payment gateway connects the The transactions behind which sets up the merchant with merchant’s website to a payment electronic payment processing a payment processor processor, which moves the are all behind the scene from the transaction from point A to point B customers’ points of view – checkout is fast and secure 3 Electronic Payment: the Payment Process Step 1: Customer Pays Step 2: Encryption Step 3: Authentication Customer makes a purchase on Customer’s personal information Payment processor validates that merchant’s website using a debit and payment transaction data is payment data is being sent by its or credit card encrypted as it moves through claimed source the payment gateway Step 4: Authorization Step 5: Settlement Step 6: Merchant is Paid Payment processor requests Occurs when the card issuer Funds are accessible in the issuing bank to authorize specific sends the appropriate funds to vendor’s merchant account amount of funds from the the merchant’s acquiring bank, customer’s account which deposits them into the vendor’s merchant account 4 Where does PayPal fit in? Customer Merchant Solution Encryption Authentication Authorization Settlement Payment Payment ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 5 PayPal Overview ▸ Formed in 1998, operating as Confinity ▸ In 2002, first IPO as PayPal and soon acquired by eBay ▸ Became standalone company in 2015 ▸ Global payments platform featuring two-sided networks (PayPal, Venmo, and Xoom), merchant acquiring platform (Braintree), and merchant and consumer credit offerings through PayPal Credit and offline payments through iZettle $20,000 22.0% Company Description $18,000 21.0% $16,000 • Core business that makes up $14,000 20.0% largest customer transaction revenues $12,000 19.0% $10,000 • ~23mm merchant websites and ~300mm+ active customers $8,000 18.0% $6,000 17.0% • Modern merchant acquirer with $4,000 emphasis on mobile eCommerce 16.0% $2,000 • Accept and process cards, PayPal, $- 15.0% Venmo, Apple Pay, etc. through one 2015 2016 2017 2018 2019 integration Total Revenue EBITDA EBITDA Margin % • Mobile payment service primarily P2P • “Pay with Venmo”, Instant Transfer, and Venmo Card 82% 18% 10% • International P2P money transfers • 56 markets worldwide • Fees can be 50% than traditional methods • Merchant and consumer loans • PayPal Business Loan ($5,000 to 90% $500,000) • PayPal Working Capital ($1,000 to Cross Border TPV Transaction Revenue $125,000) OVAS Revenue Domestic TPV CapitalIQ, 10-k, Bloomberg 6 TAM Assumptions and Rationale Global eCommerce Transaction Values ($mm) TAM 2019 ($b) $8,000,000 $6,699,201 $7,000,000 $6,094,311 $6,000,000 $5,440,455 2% 11% $4,769,370 1% $5,000,000 $4,137,523 $3,595,330 $4,000,000 $3,168,158 $3,000,000 41% $2,000,000 20% $1,000,000 $0 2017A 2018A 2019A 2020E 2021E 2022E 2023E 1% 4% Digital Commerce Mobile POS Payments 3% 17% Medium-Term Share Drivers • Potential for new marketplaces following eCommerce, ex AMZN Online Travel eBay operating agreement Core Markets, BABA & JD Ride-Sharing Food Delivery • Global expansion of PayPal’s full capabilities Online Event Ticketing Online Charitable Donations Streaming Media Subscriptions Video Gaming • Growth into B2B payments market Crowdfunding Statista, Credit Suisse Estimates 7 New Marketplaces eBay Operating Agreement • Management has stated that there are large marketplaces that PayPal is prohibited from working with due to its operating agreement with eBay • Operating agreement was created in 2015 to maintain synergies and provide strategic flexibility for the two firms • The agreement expires in July 2020 and PayPal has no intention to resign • Under the operating agreement, PayPal was barred from working with fast-growing, next-gen marketplaces, and it is highly probable that both “…And also remember, there are other big Amazon and Facebook are among these companies marketplaces out there that we're prohibited from working with because of the operating agreement…but those marketplaces are Potential New Marketplaces ready to start partnering with us…” - Dan Schulman, CEO, April 24, 2019, on the Q1 2019 • High potential for partnership with Amazon in earnings call marketplaces where it is not dominant, developing, or does not offer Prime services • Amazon sources 92% of revenue from US, UK, Germany, and Japan • The 8% outside of these markets represents a $33b international volume opportunity for PayPal in 2020E • 2018 acquisition of Hyperwallet strengthens its position with possible marketplace partners CapitalIQ, 10-k 8 PayPal: Not a Bank Competitor Pre-2016 Card Network Agreements ▸ PayPal was viewed as a disintermediary threat to card networks and card issuing partners ▸ PayPal encouraged users to fund transactions with their bank accounts (ACH) – Card networks and banks missed out on interchange income and interest income on credit cards Strategic Bank Partnerships Insulate PayPal from NeoBank Competition and Post-2016 Card Network Agreements Drive Volume for Both Parties ▸ Approach to payments ecosystem changed under Dan Schulman ▸ PayPal transformed into a top digital distribution channel for banks, which are now a key source for PayPal’s TPV and user growth 9 PayPal’s Strategic Partnerships PayPal’s global partnerships drive volume growth and create a network effect within their payments ecosystem U.S. 2017 2016 2018 Asia Pacific/Europe 10 Global Expansion of PayPal’s Full Suite Strategic International Investments Differentiated Value Proposition ▸ Commercial agreement with MercadoLibre expands PayPal’s ▸ Operates on a massive two-sided payment platform: Latin American presence and Xoom’s reach in Brazil and ~300 million consumers and ~23 million merchants globally Mexico ▸ Helps small eCommerce merchants compete: ▸ Paypal’s recent acquisition of GoPay made it the first non- industry leading mobile checkout conversion rate (89%); full Chinese payments company licensed to provide online suite of commerce solutions through a simple integration payment services in China process ▸ Paypal’s Chinese payments license enables the company to ▸ Honey acquisition: will bolster PayPal’s conversion rates offer payment solutions to Chinese businesses and consumers and enable merchants to target specific consumer through existing relationships with China UnionPay and demographics with personalized offers AliExpress – 2016 AliExpress partnership: enabled users outside of China to shop on AliExpress; ~50% of AliExpress merchants accept PayPal PayPal’s Conversion Rates vs. Others, Per Cent Untapped Countries ▸ PayPal operates in over 200 countries, but its full suite of capabilities is only available in about 10, presenting significant room for growth PayPal Conversion Other Digital Wallets Overall Conversion 48.7 55.3 88.7 Business-to-Business (B2B) Opportunity Significant Opportunity • B2B payments volume approximately $120 trillion per year globally and roughly $22 trillion per year domestically • ~$1tr of U.S. B2B payments done through card • Significant benefits for businesses as provides significant workflow automation, reduces labor costs and human error, and increases productivity PayPal Investment • PayPal has signed numerous B2B partnerships over the past few years (Sage, Reckon, OroCommerce, Xero, etc.) • PayPal Commerce offers B2B payment experiences across credit cards, PayPal, debit cards, alternative payment methods, PayPal Credit, and Pay with Venmo • PayPal continues to invest in this developing and open market 12 Braintree as an Underappreciated Asset Braintree’s Strategic Advantages Key Merchants ▸ Enables a merchant to accept PayPal (and Venmo), credit cards, debit cards, ACH (online bank transfers), and other forms of payment (Apple Pay, Google Pay, Samsung Pay) through a single contract and integration ▸ Known for ease of use within developer community, resonating with start-ups and smaller merchants ▸ Leverages the scale and reach of PayPal’s resources and partnerships Significant Runway for PayPal Integration Braintree Revenue vs. PayPal Total Revenue 37% ▸ Only about one-third of Braintree’s largest merchants accept $9.0 34% 40% PayPal $8.0 31% $7.0 27% 30% $6.0 23% 32% – Presents significant opportunity for growth as PayPal’s 29% $5.0 27% differentiated value proposition and massive payment 16% 20% $4.0 23% network create strong incentives for merchants to 20% accept payment via PayPal $3.0 $2.0 13% 10% $1.0 $1.4b $2.6b $3.5b $4.8b $6.2b $7.9b $0.0 0% 2016E 2017E 2018E 2019E 2020E 2021E Braintree Revenue % of Total PayPal Revenue % of Total PayPal Revenue (excluding PayPal Button) 13 Braintree: Mobile Accessibility
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