LoginSign Up
Paypal's Logo
Paypal (PYPL) Stock | NYSE: PYPL

The Payment Powerhouse

PayPal is an online payments business supported all around the world. Its main focus is working with online money transfers to serve as an alternative to traditional methods such as cheques and money orders.

PayPal was spun off from eBay in 2015 and provides electronic payment solutions to merchants and consumers, with a focus on online transactions. The company also owns Xoom, an international money transfer business, and Venmo, a person-to-person payment platform.

PayPal’s mission is to democratize financial services to ensure that everyone, regardless of background or economic standing, has access to affordable, convenient, and secure products to take control of their financial lives.


Adrian Iwanicki

Equity Analyst






Sign Up For PYPL Analytics

Where Are We Now

Updated on: 11/11/2021

Conviction Score


As a democratizer of payments and financial services, PayPal is near the top of our list when it comes to companies set to benefit from huge megatrends. With that, we think PayPal’s recent selloff provides a much more attractive valuation today than just a few weeks ago.

  • We think recent weakness is mainly stemming from PayPal’s retail customer supply-chain issues and somewhat weak revenue growth guidance of 18% in 2021 vs. 2020. We would not fret over the short run here – we think there is value in considering PayPal for a 5+ year investment.

  • PayPal remains a major beneficiary of COVID-induced shifts to digital forms of payment as well as general network effects. Accordingly, total payment volume rose 26% since last year to $310 billion with over 415 million active accounts in the PayPal ecosystem.

Investment Thesis

  1. PayPal is the industry-leading payment processing company who revolutionized payments on the internet upon its founding.

  2. The business operates a secure and fast payment rail to facilitate money transfers and payments over the internet with almost half a billion active accounts.

  3. The growth of Venmo in person-to-person ("P2P") finance has been explosive and leads the P2P money transfer market share.

  4. PayPal benefits from a two-sided network effect with payments via the internet. As the number of merchants that accept PayPal and the consumers / business that utilize the service grow, the whole ecosystem improves and becomes harder to disrupt.

  5. PayPal will continue to benefit from the enormous secular growth of digital payments globally and is well-positioned to take advantage of new trends that arise in payments globally.

The Basics

PayPal enables consumers and merchants to send and receive payments between each other. These transactions are processed securely without ever disclosing payment card credentials.

The consumer-merchant flow of payments are processed using a desktop computer or a mobile device. The platform is digital-native, meaning all transactions have always been processed in the PayPal digital realm.

Despite being digital-only, PayPal users can pay in-store using a credit card (like a PayPal credit card), debit card, or the "tap and pay" feature (only on Android devices).

PayPal's Consumer and Merchant EcosystemSource: PayPal Investor Day 2021 Presentation

The Consumer

The PayPal consumer uses PayPal as a digital wallet that allows them to pay for things online and in-store. Using their PayPal Cash balances, Venmo account balance, PayPal debit / credit products / cards, or stored external credit and debit cards, PayPal consumers can make quick and secure transfers of money with merchants that are connected to the PayPal Payments Platform.

PayPal pioneered the ability to perform P2P transactions. Before PayPal’s time, individuals opted to use cheques and money orders to send money to one another. Today, PayPal operates Venmo, a mobile app used in the US for consumers to shift cash between each other and make select payments with retailers. PayPal's Xoom operations are similar, but they allow for international transfers to occur between two consumers.

Consumers enjoy no fees for online and in-store purchases, as well as domestic transfers when the PayPal balance is used. There are fees associated with domestic transfers using cards and international personal transactions of any sort.

PayPal Online and In-Store Transaction FeesPayPal Fees for Sending Personal TransactionsSource: paypal.com

The Merchant

PayPal partners with merchants to reach a global customer base and facilitate all aspects related to their digital checkout. Once hooked up to the PayPal Payments Platform, merchants have access to alternative payment methods, credit solutions, risk and fraud management, and analytical tools and insights.

PayPal offers its solutions to businesses of any size. Within the Payments Platform, payments can be accepted using the PayPal and Venmo wallets, credit and debit cards, Apple Pay, Samsung Pay, Google Pay, and several other local payment methods.

Pricing is generally not cost-prohibitive. In other words, the pricing (or take rate) is typically a percentage based on total payments volume processed by a business. Most transactions occur around the 3.49% mark with a US$0.50 flat fee on top of it.

While this may seem like a lot of money, even more so than debit and credit card processing fees, PayPal facilitates easy and secure electronic payments within seconds without the need for a bank's debit or credit card to be used by the consumer. Consumers use PayPal for its convenience, especially online, and wide acceptance across merchants. Despite the high price, merchants that accept PayPal offer customers an alternative payment method that is greatly appreciated by many. In our view, consumer choice is always responsible business.

PayPal's Merchant FeesPayPal Domestic Merchant FeesPayPal International Merchant FeesSource: paypal.com

Financial Overview

Despite having many services, PayPal has two main sources of revenue:

  1. Transaction revenue

  2. Other Value Added Services

Over 90% of PayPal’s revenue comes from transactions. PayPal charges a small rate on transactions completed using the Payments Platform. These fees are generally charged to merchants and consumers that use the Payments Platform. PayPal also earns fees on other services, like currency conversion, cross-border transactions, instant fund transfers, and cryptocurrency trading. P2P transactions, like two friends sending money to each other, are completely free.

Other Value Added Services are ancillary dollars earned by PayPal through partnerships, referrals, subscriptions, gateway fees, interest and fees on loans, and interest earned on customer balances.

All that said, the main drivers of PayPal's earned revenues are the TPV processed on its platforms and the take rate (i.e., percentage of TPV) it keeps as fees for providing these services. While TPV and Transaction revenues both have been rising steadily, PayPal's take rate has actually been declining since 2012.

Because PayPal's take rate has been dropping and is now sub-2%, the main driver for PayPal's growth has been (and will continue to be) TPV. Over time, PayPal has faced take rate pressure because of its mix shift towards larger merchants and the rise in popularity of its no-fee Venmo service. Volume of transactions processed, specifically those that actually make money, are the most crucial to PayPal's future growth.

PayPal Total Payment Volume ($B) (Q3 2021)

Source: PayPal Investor Relations

PayPal Transaction Revenues ($M) (Q3 2021)

Source: PayPal Investor Relations

The last part of the value-creation equation excluded from the discussion above is margins. Declining take rates could be offset by volume growth (which has been happening) and margin expansion. However, operating leverage has not yet been realized at PayPal. The company is still innovating and spending tons of money to outpace the fierce competition in the payments world.

With take rates going down and margins staying put for the most part over the last decade, PayPal has a bit to prove on the financial front. However, there is no denying the fact that TPV and revenue growth at PayPal have been anything short of stellar. The platform is scaling and gaining remarkable prominence in the payments world.

PayPal Revenue ($M) (Q3 2021)

The Digital Wallet

In 1998, three entrepreneurs, Max Levchin, Peter Thiel, and Luke Nosek developed a cyber security business under the name Confinity. After limited success, the team decided to work on an idea with electronic payments. The start of the digital wallet, and the company PayPal, began right there in 1999.

Just a few months after PayPal released to the market, the business merged with Elon Musk's company, X.com, to work on online banking solutions. The company was trying to emphasize the ease and convenience of online banking and money transfers. In 2002, PayPal went public, trading for $13 a share. At the time, Elon Musk owned 11.7% of the company.

A few months later, eBay acquired the company for $1.5 billion. This helped to expand the practicality and usage of PayPal as nearly 25% of transactions made on eBay were done solely through PayPal.

As years went on, PayPal acquired companies to focus on security support and expansion into new markets. Most notably in 2015, PayPal acquired Xoom to help users send money internationally with ease.

Since PayPal’s split with eBay in 2015, the company has taken off in the online payment industry, reaching hundreds of millions of users.

Paying Friends for Pizza

You and your friends go out for pizza. One person pays and everyone has to pay them back. Before P2P technology, the only way to pay your friend back was to rummage through your pocket and find spare cash or pay them the next time you see them in person.

What PayPal introduced is magnitudes more convenient — open your phone, log in to an app, initiate a transfer, and within seconds, your friend will have his or her cash. The transaction is safe, protected, and fast.

Since the introduction of the technology, many companies have entered the P2P payments market, such as Venmo, Zelle, and Square’s CashApp. In 2013, PayPal acquired Venmo, enabling the company to operate two massive outlets to dominate the P2P market.

We believe acquiring Venmo was smart because both companies serve two different markets within the same industry. PayPal focuses on business-made transactions that are safe and secure to help merchants. Venmo, however, is centered around recreational day-to-day money transfer needs, like sending money for a split bill.

Riding the Rails

Before the age of digital payments, you would typically get your money from the bank. Here’s the problem: You have to actually present yourself to the teller and on top of that, the bank has to actually be open.

What PayPal popularized is a system that is open 24/7 and accessible from your couch. This is what is called a real-time payment rail. This type of digital infrastructure network emphasizes the idea of a transfer of funds between two accounts in a fast and secure manner.

How Payment Rails workSource: Toptal

PayPal and Stripe — the company’s main competitor in ecommerce transactions — use these rails to provide their merchants and personal users access to quick and easy money transfers.

Interac, a company that helps Canadian Banks provide e-transfers, uses the same system of payment rails to send money digitally.


Digital Payment technology has revolutionized the way e-commerce and money transfers work. The industry is growing at a compounded annual growth rate ("CAGR") of 20%.

PayPal leads the digital payments industry with nearly 58% market share. The three main companies trailing behind it are Stripe, Amazon Pay, and Square — all prominent names in the space. It is certainly surprising how much of a lead PayPal has on these companies even though PayPal has been around for a long time.

PayPal's leading market position is attributable to its strong payment security, speedy processing, and simple accessibility. These factors are the driving forces that keep consumers on the platform.

Payment Processing Market Share

Source: Datanyze

Competitive Advantages

Two-Sided Network

PayPal operates a classic example of a two-sided network that benefits users on both ends — merchants and consumers. The Payments Platform is platform agnostic, meaning it is supported by an array of technologies, including digital, mobile, and in-store.

The wide acceptability of PayPal is both the cause and effect of the Payment Platform's convenience, popularity, and overall value proposition to merchants and consumers alike. In simpler terms, as the number of active accounts grows and merchants are increasingly motivated to accept PayPal for payments, the Payments Platform becomes stickier for existing users and an attractive platform for new users to adopt.

As the service becomes stickier, competitors' products look less attractive to the consumer and PayPal becomes harder to disrupt.

Global Scale & Brand

PayPal is undeniably large, being an accepted payment platform across 200 regions around the world. On top of the several hundred million active consumer accounts on the platform, there are almost 30 million merchants that accept PayPal across all those geographies.

The sheer size and wide acceptance of the platform makes PayPal's competitive position versus peers more attractive.

From a regulatory standpoint, governments are more likely to accept a payments method that has been proven to work time and again across different regions and across borders.

From a business and competitive positioning standpoint, PayPal's brand recognition and robust, safe, and proven Payments Platform is attractive to many. Existing users are likely to stay on a platform of growing importance, and new users will continue to be attracted as the company expands everywhere.

Strong Balance Sheet

The digital payments sphere is flush with new ventures, many not currently profitable. PayPal, however, is a massive financial behemoth and industry veteran with profitable operations and financial flexibility. With flexibility comes loads of optionality.

PayPal gushes tons of free cash flow while having maintained a net cash position on its balance sheet for many years. After capital expenditures and research & development, PayPal still has tons of cash left over each year to exercise optionality. This could be additional research & development, expanding into new countries, purchasing assets or new businesses, or returning cash to shareholders through buybacks.

Over the last five years, PayPal has been engaging in all of these activities. We expect PayPal to continue to have the strength to do so.

PayPal Free Cash Flow ($M) (Q3 2021)

Buy Now, Pay Later

PayPal’s main goal is to create an innovative version of the “digital wallet” — a platform that can help one accomplish anything related to personal finance. Currently, the platform allows P2P services, paying merchants for goods and services, and the recently added in-app trading platform for stocks and cryptocurrency.

PayPal's hottest new initiative is its Buy Now, Pay Later ("BNPL") campaign. At millions of stores, users are able to purchase items using BNPL and pay off their balances over four installments.

BNPL is gaining popularity quickly with growth across all age segments. Consumers are realizing the value of zero-interest payments along with payment flexibility over four installments when making big-ticket purchases.

PayPal's BNPL PlatformSource: paypal.com
PayPal's BNPL Growth EstimatesSource: paypal.com

Through 2025, the BNPL market is expected to grow at a CAGR of 13% to reach a total market size of almost $700 billion.

We think PayPal has unique positioning to take full advantage of this trend and expand its TPV substantially. According to PayPal, 68% of millennial and Gen Z shoppers have used PayPal versus less than 10% across the company's three largest BNPL competitors. We believe this reconciles with the fact that PayPal has an established and trusted relationship with hundreds of millions of consumers and merchants.

Rather than attract new users, all PayPal had to do was simply turn the feature on and most (if not all) users would notice it and have the ability to start using BNPL. Simplicity is key here — having a revolutionary new BNPL feature within a heavily used platform places PayPal on the road to dominate the market.

On the monetization front, all TPV would have an applied take rate of around 3% for all transactions. While consumers do not pay to use it, merchants pay the standard fees to process payments. Growth, growth, growth.

Massive TAM Opportunity

PayPal's total addressable market ("TAM") is extremely large and growing along with the secular trend in digital payments. Besides BNPL, there are tons of growth opportunities and literally a world of money for PayPal to tap into.

PayPal has its eyes on a TAM of $110 trillion. Based on its current TPV, the company has merely a fraction of that amount.

This large potential market implies there are opportunities for many players to co-exist and reap the rewards. This market opportunity is likely too large for there to be two or three major players operating in an oligopoly. The fintech industry is fragmented, and rightfully so — many fintech firms are finding the best way(s) to serve this market and optimize for it.

PayPal's Total Addressable MarketSource: PayPal Investor Day 2021 Presentation

We see a few potential opportunities for PayPal to grow within this market, organically and inorganically:

  • Expand around the world and grow the ecosystem. As more merchants and consumers adopt the platform, PayPal can become the intuitive payments platform of choice for many more.

  • Tap into new markets, like government payments, business-to-business payments, and any emerging or future payments solutions.

  • Partner with, or acquire small fintechs that tap any of the growth areas above or enhance current offerings.

Once again, we feel PayPal is uniquely positioned given its already large global reach and consumer / merchant base. It holds a ton of market share over other large competitors. The brand name makes it a recognizable one and a trusted one that millions of consumers and merchants will turn to first for new payments solutions.

We think PayPal will continue to lead the market in digital payments and the solutions within. It is far from tired or out of touch. In fact, we think it is just getting started while staying on top of major digital payments trends.


Customer Dissatisfaction

One issue that many face is PayPal's long freeze periods when the company suspects a security or fraud risk with an account. PayPal's freeze periods are generally quite lengthy, with a minimum of 21 days but up 180 days if a lengthy investigation takes place. There have been many instances when PayPal froze an account prematurely, leaving customers with no access to their account and money. If this issue persists or gets worse, it may dampen overall consumer sentiment.


The largest risk moving forward is competition. Stripe is an API-first payment processor gaining a significant amount of market share. Developers can simply cut and paste a snippet of code to have Stripe payments set up. It is that easy.

Stripe has been touted as the better-suited platform for large merchants while PayPal appeals to smaller businesses. Stripe has plenty of developer options and third-party integrations that PayPal does not quite have.

Although the easy-to-use PayPal platform is attractive, larger merchants may want the enhanced customization that comes with Stripe.

Besides Stripe, the fintech industry is quickly growing with many emerging players. Although PayPal has the balance sheet to make many acquisitions and partnerships happen, it is possible a new technology company can upend PayPal's competitive position.

Similarly, it is possible PayPal misidentifies a fintech consolidation opportunity or executes an acquisition poorly that destroys its main strategic momentum.

Credit Risk

Unlike other leading fintech companies, like Visa or MasterCard, PayPal holds several billion dollars worth of consumer and merchant revolving and installment loans. With the rise of BNPL, we expect the amount of credit PayPal will be exposed to will continue to rise.

The credit risk associated with this bank-like business exposes PayPal to bank-like business cycles. Closer to, and during recessions, PayPal may experience substantial credit losses, especially if its loan base contains high numbers of customers with low credit scores.

Over 95% of PayPal's loans have been outstanding for fewer than 30 days. We don't see any specific risk today, however, this is a factor to be mindful of in the future as an investor.

Bottom Line

PayPal is the juggernaut of digital payments. Its revolutionary, flexible services in the digital payments industry allow it capture so much market share. Despite facing strong competition from companies like Stripe and Square, PayPal continues to hit record numbers in active users and TPV.

The company has seen stellar growth year after year, especially since its split with eBay in 2015. Should it continue to lead the market, it will still hold the title of the Payment Powerhouse.

There is still a long runway for growth across payments riding secular tailwinds in digital payments, P2P transactions, and e-commerce. PayPal holds a strong position and plenty of optionality as new trends in payments emerge.

    Join our stock investing newsletter

    Investing articles and ideas in your inbox

    We won't send you spam. Unsubscribe at any time.