About PayPal

PayPal is likely a company that you’ve heard of or used before, especially in recent history.

As it’s one of the most successful, storied financial technology (longhand for the more popularly ascribed to shorthand, “fintech”) companies in the world.

The name of the game is making digital transactions easier and more efficient.

While people used to have to input their banking card information every single time they made a transaction, PayPal ultimately played an integral role in making that process a thing of the past.

The company’s technology allows you to save your initially inputted banking information and apply and use it for future transactions in a usually seamless manner. However, the bread and butter of the company lies in its business of facilitating payment transactions between people as well as between people and businesses.

After all, the primary way in which the company generates its revenue is through transaction fees. In fact, some reports explain that 92% of their total revenue comes from transaction fees alone. The other 8% reportedly comes from value-added services such as additional features they offer users on their platform.

Now that you have a better idea as to what the company does and how it makes money, let’s get a view of the company’s stock in a broader market sense.

Shares of PayPal stock have taken a giant tumble from its five-year high of around $300 to where its currently trading at $87.

This massive drop was likely caused by the massive and widespread tech bubble pop as COVID-19 concerns and restrictions began to ease globally. It seems as though the market predicted a return to normal user levels (which were likely heightened during the brunt of the pandemic due to many not going outside and more transactions being performed digitally) which caused the stock to fall back to pre-2019 levels.

Given this somewhat sporadic stock price activity, let’s get a better idea of the quality of PayPal’s financials and ultimately whether or not you should consider investing in the company’s stock in the long run.

PayPal’s stock financials

The company currently has a market capitalization of $100.61 billion, a price-to-earnings (P/E) ratio of around 49 and doesn’t currently pay out an annual dividend.

This preliminary information indicates that the company’s share price is high relative to its value, or in simpler terms, overvalued.

Let’s see whether or not it might be worth paying a premium for shares of PayPal’s stock.

According to the company’s balance sheet, PayPal’s executive team manages around $75.8 billion in total assets and just over $54 billion in total liabilities. Their total liabilities seem slightly high relative to its total assets, especially given that only around $8 billion of their total liabilities is considered total long-term debt. We’d be far more comfortable if a majority of their total liabilities was long term by nature, however that doesn’t appear to be the case. Additionally, the company’s accounts payable (what it owes to other people or entities) has been rising each year since 2017. Nonetheless, as long as members of the company’s C-suite are good debt managers, the company will likely be fine, especially given that their total assets currently outweigh their total liabilities.

Moving onto the company’s income statement, PayPal’s total revenue since 2017 has been steadily increasing over the past five years. Specifically, in 2017 PayPal’s total revenue stood at around $13 billion and has since risen to approximately $25.3 billion as reported in 2021.

Peering over to the company’s cash flow statement, it’s definitely a positive that their net income has been fairly consistent as the global economy overall has seen its fair share of success and turmoil over the past five years. While we don’t think PayPal is recession proof stock, their cash flow overall has been consistent in recent years. For example, their net income in 2017 was just south of $1.8 billion, stayed around $2 billion between 2018 and 2019 and subsequently increased to around $4 billion in 2020 and 2021.

So far, so steady when it comes to cash flow generation.

PayPal’s stock fundamentals

As it pertains to the company’s profitability, the company’s trailing twelve month (TTM) net profit margin is considerably lower than that of the industry average, as it currently stands at 7.79% to the industry’s average of 23.73% according to TD Ameritrade’s platform.

This is disappointing but it’s a competitive industry and PayPal is a leader in this space, implying that they have extensive operations across the globe which might put a dent in the company’s current TTM net profit margin, given that lots of market share and expansion naturally requires more expenses to be incurred, inhibiting the company’s ability to turn a higher profit.

However, we still think the company’s current TTM net profit margin is overwhelmingly lackluster.

Furthermore, the company’s core return metrics are nothing to write home about as their TTM returns on equity, assets and investment are all lower than that of the industry average, again, by considerable margins.

We don’t like this at all.

To provide some scale, the company’s TTM returns on assets stand at approximately 9% lower than the industry average and its TTM returns on investment stand at around 12% lower than that of the industry.

Not a good sign for a market leader.

Hopefully as the company continues to mature and grow organically (and nonorganically) they’ll be able to eke out higher returns, or at least ones closer to or higher than that of the industry.

It should also be noted that PayPal’s return on equity is significantly lower than that of the industry (by around 40%), but that can likely be ascribed to their recent drop in share price, which to some extent, obviously, is out of PayPal’s control.

Should you buy PayPal stock?

What comforts us most about PayPal is that the company has a huge chunk of market share and some mediocre financials, namely its balance sheet as its best financial feature. People all across the globe are likely going to use PayPal, its platform and its technologies until the end of time.

However, we don’t currently think PayPal is currently worth paying a premium for, especially given that many think the economy has entered recession territory and that its fundamentals are unattractive. Much (if not all) of the company’s business model relies on people swiping or typing but when consumers generally aren’t able to purchase as much, payment companies such as PayPal are likely to suffer substantially.

Given all of this information, we give PayPal stock a “sell” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.