PayPal Holdings Inc - Two-sided network effect getting stronger

11 Oct 2022
  • Total payments volume spiked >3x in last 5 years, with the company adding over 200mn active accounts. Powerful two-sided network effect, increasing digital payments and growth of online shopping to drive revenue growth of 13% over the next 2 years.
  • PayPal is a compelling business partner as it boosts conversion rates/sales for merchants. Customers are more likely to complete a purchase when core PayPal checkout is available than those using credit cards due to stored credentials.
  • PayPal benefits from newer consumer-to-consumer payment trends through its peer-to-peer (P2P) Venmo payment service. Venmo’s total payments volume surged 45% YoY to US$230.1bn in FY21. Venmo will also be available on Amazon later this year.
  • We initiate coverage with a BUY recommendation and DCF-based target price (WACC 7.0%, g 4.0%) of US$116.


Company Background

Spun off from eBay in July 2015, PayPal Holdings Inc (PYPL) is a global provider of digital and mobile payment solutions. The company’s two-sided platform serves nearly 426mn active accounts in over 200 markets. Its payment solutions include PayPal, Venmo, Xoom and Honey. PayPal generates nearly 90% of its total revenues from transaction revenues.


Investment Merits

  1. PayPal’s two-sided network is a key competitive advantage. PayPal’s active accounts grew by 13% YoY to 426mn in FY21, while it added 197mn net new accounts over the last four years. This is mainly due to its two-sided platform that serves both consumers and businesses. This allows PayPal to leverage consumer information to boost sales for merchants by providing shopping deals for its digital wallet users. PayPal’s total payments volume (TPV) has also spiked to US$1.2tn in FY21 from US$578bn in FY18 due to a larger user base and an increased number of payment transactions. We expect PayPal to continue double-digit revenue growth of 13% over the next 2 years due to network effects and secular trends in the payment industry, including increasing digital payments adoption and the rise of online shopping.
  2. PayPal helps to boost checkout conversion rates/sales for merchants. Online merchants witness a higher conversion rate as consumers who choose PayPal Checkout as a payment method are less likely to abandon their cart due to a better buying experience through stored credentials. The company boasts conversion rates of 80%-90% compared to an industry average of ~50%. That value proposition help PayPal to partner with nearly 75% of the top 1,500 retailers in North America and Europe, including Walmart, Shopify, and PayPal also offers working capital loans to its merchants which contributes to increased merchant sales and thereby surge in volume of payments processed. We believe that new products and services such as QR Code payments and Buy Now Pay Later should also help improve checkout conversion for merchants and increase customer engagement with PayPal digital wallet.
  3. Venmo monetization to support growth. Initially allowing peer-to-peer (P2P) money transfers with friends and family, Venmo now keeps on adding features to its app. Users can now create business profiles to accept payments, pay for purchases at over 2mn PayPal merchants across the U.S, and buy/sell cryptocurrencies. Venmo’s total payments volume surged 45% YoY to US$230.1bn in FY21. We believe that another significant milestone for Venmo’s growth will be its partnership with Amazon, under which Amazon will accept Venmo payments on its platform.


We initiate coverage with a BUY rating. Our target price is US$116 based on a DCF valuation with a WACC of 7.0% and terminal growth of 4.0%.



PayPal has two revenue segments: Transaction revenues (92% of FY21 revenues) and revenues from other value-added services (8%). Transaction revenues are generated from fees charged to consumers and merchants based on the total payments volume (TPV). Other value-added services include revenue from subscription fees, partnerships, referral fees, and interest earned on loan receivables or certain customer balances.


Total revenue expanded at 18% CAGR in the past four years (Figure 1) to US$25.4bn in FY21.

Over FY18-21, PayPal’s TPV rose at a CAGR of 29% to US$1.3tn in FY21 (Figure 2). The growth was mainly driven by the number of active users, merchant acceptance, and the secular shift towards digital payments and e-commerce. PayPal generates revenues from operations in several regions, primarily the US (54% of FY21 revenues) and the UK (9%) (Figure 3).

About the author

Ambrish Shah
US Technology Analyst (Software/Services)

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