15 Comments
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LMN's avatar

If PayPal is able to buy back 9% of its shares last year and you expect them to continue this plus 3 and 5% in revenue growth, why is your projected EPS only 9% for the next 2 years?

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Daan | InvestInsights's avatar

I don't expect this rate of repurchases to last for another 2 years, and EPS growth should be limited amid considerable investments.

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LMN's avatar

Hm, why not? They have done so for the last two years and as long as share price i slow, I would expect this to continue. Otherwise what will they do with cash? hopefully no acquisitions again :D

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Daan | InvestInsights's avatar

For one, I don't expect the share price to remain as depressed over the next two years as it is right now, which will not allow management to buy back as much stock as it has in recent years. Second, I am assuming higher cash investments in the business, rather than buybacks, on a relative basis. As a result, we can assume that PayPal continues to allocate $5-6 billion annually for repurchases, which I now assume will enable it to repurchase 6-7% of its shares on average per year.

Meanwhile, I am now assuming that organic EPS growth will remain lower over the next two years due to higher investments in technology and marketing. That is how I arrive at my current estimates.

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Willa Eileen's avatar

I was going through the terms and condition at paypal.com, I agree that it is becoming digital commerce platform for both consumers and merchants. The terms & condition for personal, consumer and merchant transaction are refined more. I tried to make a summarize tool on these for paypal users onlinegebuehrenrechner.de but still it is not covering all the terms and condition.

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Willa Eileen's avatar

I agree

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anthonyasael's avatar

is the reduction of the take rate no matter for concern ?

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Daan | InvestInsights's avatar

In this situation not. This is the results of larger, less profitable volumes. However, with operating margin and TPV strong, this isn't a reason for concern (yet).

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Europe Capital's avatar

Totally agree. So many tailwinds for PayPal.

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Ray Myers's avatar

What do you think the market is missing, why is the valuation so compelling? Do investors just not believe PayPal can be turned around? Could terrible execution by Dorsey be affecting Paypal's stock, as these 2 fintechs could be grouped together.

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Daan | InvestInsights's avatar

Not sure it's so much a disbelief in the turnaround, possibly more of a waiting game for stronger signals that a turnaround is in the making, and PayPal can indeed better compete with the likes of Stripe and Apple. Investors still seem cautious.

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GT's avatar

Thank you for sharing this thesis on PayPal. It is very well presented. Now, there's something I would like to understand better:

To what extent is the projected EPS growth due to real improvements in the business and not just the effect of share buybacks?

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Daan | InvestInsights's avatar

Thank you, GT!

I would say the answer is about 50/50. Buybacks remain very important.

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GT's avatar

Thanks for the response. I understand that buybacks play an important role, and I agree that they can be a valuable tool for creating value if done efficiently. However, in this particular quarter, I find it hard to see a 50/50 balance between real operational improvements and the effect of buybacks.

EPS grew 23% year over year, but revenue barely increased by 1%. This suggests that most of the EPS growth came from margin expansion and the reduction in the number of shares, rather than from significant operational growth. While margins improved, the weak top-line growth raises questions about the sustainability of the earnings momentum if the underlying business growth doesn’t accelerate.

That’s why I believe it would be useful to distinguish between structural operational growth and financial growth derived from buybacks, especially when projecting future EPS and evaluating whether the market can assign a higher multiple based on that dynamic.

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Daan | InvestInsights's avatar

Operational growth was lacking last quarter and is likely to be lacking in the few quarters ahead. Indeed, EPS growth currently comes from expanding margins thanks to operating leverage, a focus on higher-value volumes, and buybacks.

So far, we aren't seeing a top-line turnaround, which I expect will take at least until early 2026 to appear, assuming economic growth doesn't weaken considerably for longer. It seems like many are waiting for stronger signs of a possible turnaround before jumping on PayPal.

And yes, of course, there is only so much margin expansion possible if top-line growth continues to be weak, but I anticipate it too improve, which I accounted for in my growth projections, of which about 60/70% comes from operational improvements and subsequent margin expansion, and another 30/40% from buybacks

Still, you make a good point. I will get deeper into this breakdown in my next PayPal update.

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