Is PayPal Dead Money or Deeply Mispriced?!
From Frankenstein acquisitions to a focused rebuild: what has to go right for PYPL to work?
We recently caught up with Emir from Type-F Capital Equity Research, who has just relocated to Japan, to discuss one of the most popular, or rather unpopular, stocks in the market: PayPal.
The stock is down over 80% from its all-time highs. It has been dead money for five years. To the average observer, it’s a legacy payments dinosaur being eaten alive by Apple Pay and Stripe. And maybe rightfully so…
Here are the key takeaways from our PYPL 0.00%↑ conversation with Emir.
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1️⃣ - The Valuation Disconnect
The most compelling argument Emir presented wasn’t about AI or fancy new products; it was a simple Reverse Discounted Cash Flow (DCF) analysis.
Instead of guessing future growth, he asked, What is the market currently pricing in?
At ~$56 per share, using 2024 free cash flow margins, the market is pricing PayPal as if its revenue will decline by 6% annually for the next 10 years.
“The market is expecting them to do $32 billion in 2024, but only $17 billion in 2034” - Type-F Capital
Now, to be completely honest, looking at revenue for PayPal is not fair if you ask us. Revenue can be ‘empty calories.’ You can buy revenue, and not all revenue is of the same quality. We would recommend looking at Transaction Margin Dollars (TM$).
TM$ is growing 7% YoY! Unless you believe PayPal is literally going to shrink by half over the next decade, the current price implies a massive dislocation between perception and reality.
So… if revenue and the core KPI are growing… What are investors seeing and fearing?
2️⃣ - The Frankenstein Problem
During our conversation we addressed the elephant in the room. PayPal has historically been a bloated Frankenstein company. A collection of acquisitions, such as Venmo, Braintree, Honey, etc. All these companies never really synergized with each other.
"Venmo and PayPal... used to be like two separate entities within the company and they did not collaborate... I think that has been changing." - Type-F Capital
The previous management was criticized for de-worsification. However, the new CEO, Alex Chriss, seems to be doing the dirty work required to fix this:
Replacing the entire management team.
Shifting from growth at all costs to profitable growth (TM$).
Finally making Venmo and PayPal interoperable (e.g., cross-border payments).
Innovating (potential ads business, using its data vault, Fastlane, a.o.)
While the market is impatient for results, the internal structural changes are happening.
3️⃣ - A Race to the Bottom
“It is kind of a race to the bottom when it comes to payment processing... All they do is undercut each other into perpetuity.” - Type-F Capital
A common bear case is that Stripe and Adyen will commoditize payment processing. Emir and I mutually agree that processing is a race to the bottom on price. If PayPal only competed on processing fees, they would lose.
But PayPal has a moat that Stripe and Adyen don’t: a one-of-a-kind data vault. PayPal controls one of the largest datasets of consumer spending behavior globally.
~25-30% of all cards in circulation are vaulted with PayPal.
They have data on 300 million+ active accounts.
Holds approximately 6+ billion vaulted financial instruments
500+ petabytes of data (that’s 500 trillion gigabytes)
Whether these are fancy words or real value remains to be seen. What we do know is that this data is the key to their future ad business. Unlike a generic payment processor, PayPal knows exactly what you buy, when you buy it, and which card you use. If they can successfully pivot to an ad-supported model (serving highly targeted offers based on purchase history), they can exit the race to the bottom on fees.
4. The Buyback Floor: Privatization by 2031?
“If I take my valuation model and the free cash flow that I forecast... if that goes towards buybacks, the company will be private by 2031. […] There is nowhere else for the stock to go because if it just keeps going down, they're just going to take the company private. […] I don't mind if the stock stays down... that will just accelerate the pace of buybacks.” Type-F Capital
Here is where the math gets fun. Because the valuation is so compressed, PayPal’s share buybacks are incredibly effective. They have retired more than 6% of their total shares every year since 2023.
Emir pointed out that if PayPal continues to generate cash at its current rate and uses it to buy back stock at these depressed levels, they could theoretically retire all outstanding shares and take the company private by 2031.
Obviously, he’s being pretty optimistic here, but he’s mostly highlighting how crazy the buyback pace is. Realistically, it would probably take closer to 12 to 15 years. But that doesn’t mean he’s wrong. This creates a massive floor under the stock price.
PayPal currently has a market cap of ~$53B and generates ~$6B in free cash flow. That is a buyback yield of roughly 11%. Even if the business's (revenue/profit) stays flat, the earnings per share (EPS) should rise substantially because there are fewer shares dividing the pie. As EPS rises due to the buybacks, the stock price will almost certainly rise.
5️⃣ - A Risky Business…
As you know, we always try to stick to the facts and stay objective, nuanced, and honest. We don’t believe in black and white; we believe in shades of gray. And if we’re truly striving for objectivity, we have to ask, What could go wrong?
The ad platform and PayPal Everywhere initiatives are still unproven. We haven’t seen material financial results yet.
Apple Pay and Google Pay are undoubtedly taking market share in branded checkout.
If the bear case is right and PayPal really is a melting ice cube, the cheap valuation is a trap.
We go much deeper in our PayPal deep dive. This company required a 45-page deep dive. For those that just want to hear our thesis and thoughts, the podcast is for you.
You can find more of Emir’s research here: Type-F Capital Equity Research.
🚨 Disclaimer: This is not financial advice. Do your own due diligence.