PayPal: No Reason To Buy - Part  2

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About: PayPal Holdings, Inc. (PYPL)
by: Oleh Kombaiev
Summary

The whole market PayPal is operating in is affected by the network effect, and at my glance, the critical mass of users is not reached yet.

I expect PayPal's revenue growth will continue to accelerate at least until 2021, and the CAGR will amount to 16% in the next 10 years.

But even on the basis of the extremely optimistic development scenario of PayPal, the DCF model has not shown growth potential.

In my previous article dealing with PayPal (PYPL) I pointed to clear signs of the current overvalued state of the company. That review turned out to be so categorical that I decided to check my conclusions by building a DCF model.

As I noted in the previous article, I like PayPal's business model. Therefore, when building the DCF model, I used the most positive input parameters, sometimes even super positive...

The whole market PayPal is operating in is affected by the network effect, and at my glance, the critical mass of users is not reached yet. The demand for services provided by PayPal increases with every new active account:

PayPal

Against this background, I expect PayPal's revenue growth will continue to accelerate at least until 2021, and the CAGR will amount to 16% in the next 10 years:

It is worth noting that my forecast of PayPal's revenue on the horizon of the next year is higher than the most optimistic expectations of the analysts:

Here is the WACC calculation:

WACC of PayPal

To calculate the WACC, I used a one-year rolling beta coefficient which is at a record high now:

I proceed from the assumption that PayPal's beta coefficient will decrease in the long term. Accordingly, this will reduce the WACC.

PayPal is developing its ecosystem, embedding its services in the ecosystems of other companies. At my glance, such a business model does not, in principle, imply high profitability. Besides, speaking of a ten-year perspective, it is worth taking into consideration that the inevitable increase in competition in the digital payments market will put its pressure on the profitability of the entire industry. However, in the model, I ignore these arguments, and I assume that the operating margin will remain at the average level of the last five years.

Further, I assume that CAPEX will remain at the current average level. This scenario can also be considered a very optimistic one.

The model assumes only a gradual increase in the relative size of the tax rate to the average worldwide level of 25%.

And here's the model itself:

DCF of PayPal

So, the DCF-based target price of PayPal's shares is $75, offering 31% downside.

Conclusion

In its essence, a DCF model gives an approximate idea of ​​the long-term rational value of a company because the result is subject to high error. But in this particular case, it should be noted that even on the basis of the extremely optimistic development scenario of PayPal, the model has not shown growth potential. Personally, I see in this a confirmation of the fact that now PayPal is overvalued.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.