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RESEARCHNovember REPORT11, 2019 A NovemberPenny for Our11, 2019 Thoughts Stock Rating BUY Insert Picture in Master View Price Target $115.29 Current Price $101.42 Bear Price Bull Case Target Case $103.41 $115.29 $131.49 Ticker PYPL PayPal Market Cap (MM) $119,090 A Penny for Our Thoughts EV/EBITDA 35.3x P/E 47.6x Earlier in the year, when the FIG team was revisiting the theses for Visa, one company that piqued our interest with its differentiated 52 Week Performance strategy was PayPal. Given our overall confidence in the payment processing space, the FIG team wanted to investigate the PayPal name further to see if it was a worthwhile addition to the portfolio. 150 The first goal of this report was to better understand the complex payment processing space that the FIG team began examining this 130 year in our Visa report. While the last report focused on in-person payments, this report sheds further light on the e-commerce space. The second goal is to determine whether PayPal has strong economic moats and if so, if PayPal would give the FIG portfolio 110 meaningfully different exposure than Visa. To guide our analysis, the FIG team posed three key question 90 regarding PayPal: 22-Feb-19 22-Jun-19 20-Oct-19 PYPL S&P100 I. What are the key differences between PayPal and Visa? II. Does PayPal have any advantages that can allow it to be a winner in the online payments space? Financial Institutions III. Does PayPal have the managerial expertise to navigate the Linna Li rapidly changing and competitive digital payments space? [email protected] Finally, the FIG team considered valuation using both a discounted Henry Yu cash flow model and a comparable companies analysis. To conclude, [email protected] the FIG team believes that PayPal is a strong company with an attractive valuation. Karan Goyal [email protected] The information in this document is for EDUCATIONAL and NON-COMMERCIAL use only and is not intended to Max Bernardi constitute specific legal, accounting, financial or tax advice for any individual. In no event will QUIC, its members or directors, or Queen’s University be liable to you or anyone else for any loss or damages whatsoever (including [email protected] direct, indirect, special, incidental, consequential, exemplary or punitive damages) resulting from the use of this document, or reliance on the information or content found within this document. The information may not be reproduced or republished in any part without the prior written consent of QUIC and Queen’s University. QUIC is not in the business of advising or holding themselves out as being in the business of advising. Many factors may affect the applicability of any statement or comment that appear in our documents to an individual's particular circumstances. © Queen’s University 2019 November 11, 2019 A Penny for Our Thoughts Table of Contents Company Overview: History of PayPal 3 Company Overview: PayPal Operations 4 Recent Key Developments 5 Industry Overview 6 Key Question 1: What’s the Difference Between PayPal and Visa? 7 Key Question 2: Does PayPal Have What It Takes to Be A Winner? 8-11 Key Question 3: Capital Allocation and Management Compensation 12-14 Valuation 15-16 Appendix 17 2 November 11, 2019 A Penny for Our Thoughts Company Overview: History of PayPal Confinity Growth of Merchant Services PayPal was originally founded in 1998 as Confinity by a By 2010, PayPal had achieved over 100 million active six-person team that included Max Levchin, Perter user accounts in 190 markets and 25 different Thiel, Luke Nosek, Ken Howery, Yu Pan and Russel currencies. While much of PayPal’s focus was on Simmons. The Company’s initial business was acquiring consumer users, PayPal also continued to developing security software for handheld devices. The grow its Merchant Services division by providing e- money transfer service that PayPal is known for today payments for retailers on eBay. In 2011, PayPal was not developed under Confinity until 1999. In 2000, announced that it would begin moving its business Confinity merged with X.com, an online banking offline so that customers can make payments via company founded by Elon Musk. Musk was primarily PayPal in stores. In 2012, PayPal announced its interested in the money transfer business that partnership with Discover Card to allow its payments Confinity was developing and decided to terminate to be made at any of the 7 million stores in Discover X.com’s other banking operations to focus on the Card’s network. By the end of 2012, PayPal had money transfer service. Musk replaced Peter Thiel as reached ~$145 billion in total payment volume CEO of X.com and renamed the company as PayPal in processed. 2001. The Company executives took PayPal public in 2002 and listed at $13 per share. Spin-Off from eBay eBay Acquisition In September 2014, eBay announced that it would spin-off PayPal into a separate publicly traded Shortly after PayPal’s IPO, the Company was acquired Company. This move had been demanded of PayPal by eBay in October 2002. eBay paid $1.5 billion for earlier in 2013 by activist hedge fund Icahn Enterprises. PayPal, with a valuation of $23 per share. At the time, The spin-off was completed in July 2015. The existing eBay was the dominant e-commerce player in the eBay-PayPal agreement will end in 2020, after which space and grew PayPal’s presence on the site to PayPal will remain a payment option for shoppers on several million users, covering more than 70% of eBay, but will no longer be prominently featured and eBay’s auctions. At the time, PayPal faced competition promoted. PayPal will also cease to process card from eBay’s subsidiaries, Billpoint, Citibank’s c2it, payments for eBay at that time. Yahoo’s PayDirect, Google Checkout and Western Union’s BidPay service. All of these competitors Post-Spin-Off PayPal terminated operations in subsequent years. Since its spin-off from eBay, PayPal has focused on Over the next 10 years, under eBay, PayPal expanded building its platform and expanding its product and its business through several methods. In 2005, PayPal service offerings. In 2015, PayPal acquired Xoom acquired VeriSign to expand its e-commerce business Corporation for ~$1 billion. Xoom is a digital money and provide additional security for its payment transfer company that gives PayPal access to 1.3 processes. In 2007, PayPal partnered with MasterCard million active U.S. customers, strengthening PayPal’s to launch the PayPal Secure Card service, a software international business. Other acquisitions included that allows customers to make payments on websites international payment processors, money transfer that do not accept PayPal directly. By the end of 2007, businesses and peer-to-peer payment platforms. PayPal was generating $1.8 billion in revenue annually. 3 November 11, 2019 A Penny for Our Thoughts Company Overview: PayPal Operations PayPal Platform Overview EXHIBIT I PayPal operates a two-sided network where both Gross Payment Volume ($B) merchants and consumers have PayPal accounts with stored balance functionality. This effectively means $800 that PayPal is an end-to-end service provider, in contrast to traditional payment processors like Visa. CAGR: 27% PayPal’s network includes PayPal, PayPal Credit, $600 Braintree, Venmo, Xoom and iZettle. PayPal enables consumers to exchange funds with $400 merchants using a variety of funding sources including bank accounts, PayPal account balances, PayPal Credit accounts, credit or debit cards, or other stored value $200 CAGR: 33% products such as coupons and gift cards. PayPal, Venmo and Xoom products also allow for the transfer $0 of funds between customers, creating strong peer-to- 2015 2016 2017 2018 peer services (P2P). Square PayPal On the merchant side of the transaction, PayPal also offers a variety of services similar to those of a traditional payment processor. They provide Source(s): Company Filings authorization and settlement capabilities. PayPal’s key value proposition to merchants is its ability to facilitate EXHIBIT II cross-border transactions securely and with reduced complexity compared to other similar providers. Revenue by Geography ($MM) PayPal earns revenues primarily by charging fees for $18,000 completing payment transactions and other payment- $15,451 related services. PayPal’s revenue is driven by the volume of activity on its Payments Platform and has $13,094 grown significantly over the past 4 years (Exhibit II). $12,000 $10,842 Generally, PayPal does not charge consumers to fund $9,248 or draw from their accounts. However, PayPal does charge fees for foreign currency exchange. PayPal also earns revenue on other value-add services such as $6,000 PayPal Credit products, subscription fees, gateway services and other services provided to merchants. Gateway services provide the technology that links a $0 merchant’s website to its processing network and 2015 2016 2017 2018 merchant account and enables merchants to accept payments online with credit or debit cards. U.S. U.K. Other Source(s): Company Filings 4 November 11, 2019 A Penny for Our Thoughts Recent Key Developments 1) Q2 2019 Guidance Revision and Investor network or to become a merchant partner. For Sentiment example, at the end of 2018, PayPal invested in Viva Republica, a fintech startup in Korea that created Toss. In Q2 2019, PayPal revised guidance for FY2019 Toss is a P2P money transfer service with over 10 downwards, which resulted in a drop in the Company’s million users. This would give PayPal access to the share price. This revision was primarily due to a slower Korean market as well as technology that would than expected ramp-up of previous acquisitions and improve its existing P2P services.
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