Double-digit growth
PayPal (PYPL -0.99%), a prominent player in the industry, has faced challenges in delivering returns to its shareholders. Over the past five years, the stock has experienced a decline of 28%, while the Nasdaq Composite Index has soared over the same period.
To achieve this goal, PayPal needs to focus on double-digit growth. The rapid growth of online shopping and the increasing digitization and globalization of commerce provide a favorable backdrop for PayPal’s future success.
One crucial metric that must expand is the total payment volume (TPV). From $451 billion in 2017 to nearly $1.6 trillion in the most recent quarter (Q3 2023 ended Sept. 30), PayPal has consistently gained wider adoption.
With its digital wallet being the most widely accepted in North America and Europe, holding nearly 80% market share among the top 1,500 merchants in these regions, PayPal has established itself as a trusted industry leader.
Furthermore, PayPal’s operation of a two-sided ecosystem allows for a more comprehensive data collection process, enabling better fraud detection and higher authorization rates compared to competitors who only engage with one side of the transaction.
Revenue growth should also align with TPV growth. Wall Street estimates project a healthy compound annual growth rate of 8.4% for PayPal’s sales from 2022 to 2025.
Boosting the bottom line
Apart from increasing revenue and usage of its payments platform, PayPal must showcase operating leverage. Despite challenges faced in the past, this is a crucial factor to achieve the doubling of its stock price.
Transaction margin has witnessed a decline from 65.1% in Q4 2017 to 45.4% in the most recent quarter due to the diminishing transaction take rate. As competition intensifies, pricing pressure will likely contribute to a continued decline in the take rate.
Meanwhile, PayPal’s operating margin has remained relatively steady over the years, but it’s not at the level that payments networks ideally should benefit from. With the infrastructure already established, each additional transaction should yield a higher margin.
However, PayPal generates substantial free cash flow that can be utilized for aggressive stock buybacks.
Higher valuation multiple
The final piece of the puzzle lies in investor sentiment. Given the decline over the past two and a half years, PayPal trades at an inexpensive valuation, with a price-to-earnings (P/E) multiple of only 18.5, cheaper than the broader S&P 500.
While it remains uncertain what PayPal’s P/E ratio will be in five years, strong revenue and earnings growth can potentially support a higher valuation, serving as a significant catalyst for the stock price to double. This optimistic outlook is fueled by the belief that PayPal Shares have the potential to double within the next five years.