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PhillipCapital starts PayPal Holdings at 'buy' with TP of US$116

Felicia Tan
Felicia Tan10/14/2022 11:12 AM GMT+08  • 4 min read
PhillipCapital starts PayPal Holdings at 'buy' with TP of US$116
PayPal Holdings, which was spun off from eBay in July 2015, is a global digital and mobile payments solutions provider. Photo: Bloomberg
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The Phillip Research team at PhillipCapital has initiated coverage on PayPal Holdings with a “buy” call as it sees several positives on the company.

The team has also pegged a target price of US$116 ($166.27) on the company.

PayPal Holdings, which was spun off from eBay in July 2015, is a global digital and mobile payments solutions provider. PayPal Holdings’ payment solutions include PayPal, Venmo, Xoom and Honey; the company generates nearly 90% of its total revenues from transactions.

In its report dated Oct 11, the team notes that the company’s two-sided network is a “key competitive advantage” with its active accounts growing by 13% y-o-y to 426 million in the FY2021 ended Dec 31, 2021. The company also added 197 million net new accounts over the last four years.

“This allows PayPal to leverage consumer information to boost sales for merchants by providing shopping deals for its digital wallet users,” reads the report.

PayPal’s total payments volume (TPV) also spiked to US$1.2 trillion in the FY2021 from US$578 billion in the FY2018. The growth was attributable to a larger user base and an increased number of payment transactions.

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“We expect PayPal to continue double-digit revenue growth of 13% over the next two years due to network effects and secular trends in the payment industry, including increasing digital payments adoption and the rise of online shopping,” the team writes.

PayPal has two revenue segments: transaction revenues which make up 92% of its FY2021 revenues and revenues from other value-added services, which make up 8% of PayPal’s FY2021 revenues.

Transaction revenues are generated from fees charged to consumers and merchants based on the TPV. Other value-added services include revenue from subscription fees, partnerships, referral fees, and interest earned on loan receivables or certain customer balances.

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Total revenue expanded at a compound annual growth rate (CAGR) of 18% for the past four years to US$25.4 billion in the FY2021.

From FY2018 to FY2021, PayPal’s TPV rose at a CAGR of 29% to US$1.3 trillion in the FY2021.

“The growth was mainly driven by the number of active users, merchant acceptance, and the secular shift towards digital payments and e-commerce,” says the team. “PayPal generates revenues from operations in several regions, primarily the US (54% of FY21 revenues) and the UK (9%).”

PayPal’s gross margins have also generally remained stable at 55% over the last four years.

Its cash flow from operations have risen at a CAGR of 26% to US$6.3 billion from FY2018 to FY2021.

Paypal’s helping to boost checkout conversion rates is a plus

PayPal, which helps to boost checkout conversion rates and sales for its merchants, is another plus.

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According to the team, online merchants say they 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.

“The company boasts conversion rates of 80%- 90% compared to an industry average of [around] 50%,” the team notes. “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 Booking.com.”

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,” the team adds.

Venmo to support company’s growth

The monetisation of Venmo will also help support the growth of the company. Venmo, which initially allows peer-to-peer (P2P) money transfers with friends and family, has constantly been adding features to the app.

Users can now create business profiles to accept payments and pay for purchases at over two million of PayPal’s merchants across the US. Venmo users can also buy and, or sell cryptocurrencies on their platform.

In the FY2021, Venmo’s total payments volume surged 45% y-o-y to US$230.1 million.

Venmo will also be available on Amazon, which the team sees as “another significant milestone for Venmo’s growth”.


Despite its positive outlook, the team notes that the company carries several risks, which includes security breaches and system failures.

“A system breach by hackers or service failures that delayed the transfer of funds could result in significant out-of-pocket costs and customers using the service less frequently,” says the team.

PayPal also faces competition from several players in the digital finance and payment solution markets such as Apple Pay, Amazon Pay, Visa and Square.

In addition, a deterioration in the macroeconomic environment or a sudden surge in the unemployment rate could reduce consumer sentiment and spending, thereby impacting PayPal’s revenue growth and profitability.

Shares in PayPal closed 23 US cents higher or 0.27% up at US$84.04 on Oct 13.

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