PayPal is now valued at $46 billion and the future is very bright. Analysts expect strong total processing value (TPV) growth to drive solid mid-teens FX neutral organic revenue growth through the intermediate-term, despite lower take-rates associated with rapidly growing mobile payments.
Fitch Ratings has assigned an initial ‘BBB+’ long-term Issuer Default Rating (IDR) to Paypal.
The ratings and Outlook reflect Fitch’s expectations for a continuation of strong operating performance within the context of secular growth markets and conservative financial policies through at least the intermediate-term.
Fitch expects profitability will remain strong although intensifying competition or regulation, as well as from increased exposure to emerging markets and increased mobile penetration, may pressure margins over time. Fitch expects elevated investments in systems, software and processes in connection with the company’s recent restructuring actions, will drive faster time to market for new products and services. As a result, Fitch expects operating EBITDA margin to remain in the mid-20s through the forecast period.
Fitch expects strong profitability will drive solid annual free cash flow (FCF) of more than $1.5 billion, despite elevated capital spending and the use of cash to expand credit. Fitch also expects Paypal will make acquisitions, potentially debt-financed, to expand its mobile payments platform, similar to the company’s recent acquisition announcement of leading international digital payments provider, Xoom Corporation, for $890 million of cash. Fitch does not anticipate meaningful shareholder returns through the intermediate term.
Fitch believes the rapidly growing and highly fragmented digital payments market tempers significant risks associated with emerging payments players and technologies. Expectations for share gains by formidable new entrants, including Apple Pay, Google Pay and Facebook, may be constrained by these companies’ footprint, investment thresholds and focus, and regulatory infrastructure. At the same time, a lack of scale could constrain penetration by smaller mobile players.
The company’s ratings reflect:
–$1.5 billion to $2 billion of annual FCF through the forecast, driven by solid profitability, despite elevated capital spending to support significant investments in systems;
–Strong liquidity and conservative financial policies through at least the intermediate term, supported by $6 billion of cash at separation, strong FCF, and modest shareholder returns;
–Strong secular revenue growth within fragmented digital payments markets and supported by a highly diversified consumer and merchant account base.
Concerns center on:
–Long-term risks from new entrants and technologies in digital payments, given robust growth, high profitability and significant market fragmentation;
–Potential revenue pressure from increased competition, potential changes in regulation, increasing mobility penetration, and faster growth in developing economies;
–Substantial investment requirements and acquisitions to maintain and expand share in evolving digital payments markets.
–Revenue growth in the low- to mid-teens through the intermediate-term, in line with online growth. Potential upside from share gains in mobility and offline;
–Operating EBITDA at 26%, driven by solid revenue growth and restructuring;
–Capex remains elevated at 10% of revenues for 2015-2016 and declines to 9% in 2017;
–Profitability pressures from increased sales in developing economies and mobility partially offset by restructuring actions and investments in faster time to market for new products and services, resulting in operating EBITDA margin maintained in the mid-20s;
–Modest shareholder returns through the intermediate-term, given expectations for acquisitions;
–No debt issuance through the forecast period in the absence of mid-size to larger acquisitions.
Positive rating actions could occur if:
–Management commits to total leverage near 1.5x, signalling the company is confident it has achieved sufficient scale to organically fund acquisitions over the longer term and organic growth prospects to limit share repurchases to FCF; or
–Sustainable share gains in mobility and offline, driving revenue growth in line with the broader market and resulting in greater FCF scale.
Negative rating actions could occur if:
–Total leverage near 2.5x on a sustained basis from debt-financed acquisitions and share repurchases, indicating a shift in financial policies in the face of greater than anticipated profitability pressures; or
–Meaningfully lower than market top line growth, pointing to a less competitive mobility and offline strategy.
Fitch believes Paypal’s liquidity is strong, pro forma for the separation, and supported by more than $6 billion of cash ($2 billion of which is located in the U.S.) and strong annual more than $1.5 billion of annual FCF. The company will separate without a bank credit facility, although Paypal currently accesses other external funding sources to support receivables and credit growth. Importantly, Paypal will have no debt at separation and sufficient liquidity to organically fund acquisitions through the intermediate term.
PayPal racked up an 11.1% gain in year-on-year (YOY) accounts to 169 million. PayPal, a force to be reckoned with as it jettisons from eBay this year, is going to be a wrecking ball to the payments industry.
PayPal net total payment volume (TPV) grew 20% in the second quarter to $66 billion, with Merchant Services volume up 27% and on-eBay volume down 1%. On an FX-neutral basis, PayPal TPV grew 28%, with Merchant Services volume up 36% and on-eBay volume up 6%.
Payment volume through eBay Marketplaces was $14.5 billion, representing 22% of total TPV. Revenue grew to $2.3 billion. PayPal grew new active accounts 11% to 169 million and processed 1.1 billion transactions. We continued to deepen customer engagement with our customer base: in the second quarter transactions per active account increased to 24 per year, compared to 21 times a year ago, and monetization per active account increased to $50 per year.
The strong, steady growth of PayPal’s customer base coupled with rising engagement continues to prove the brand’s growing popularity and value proposition globally. PayPal also agreed to acquire Xoom Corporation for approximately $890 million net of cash.
The Company anticipates acquiring Xoom will help accelerate PayPal’s entry into the $600 billion global remittance market, and that adding additional services to our technology platform will allow PayPal to amplify its consumer flywheel, creating a more powerful network effect.
Q2/14: 152.5 million
Q3/14: 156.9 million
Q4/14: 161.5 million
Q1/15: 165.2 million
Q2/15: 169.0 million
For data, background and forecasts on PayPal: Search CardWeb.com’s CardFlash® Library of more than 58,000 archived articles; Access CardWeb.com’s CardData® for current and historical Performance, Portfolios, Profiles, etc. Visit RAM Research® (ramresearch.com) for quarterly and annual forecasts covering more than 150 metrics. [complimentary or deeply discounted access to CardWeb.com subscribers].
Additional database resources include CardWeb.com’s CardExecs® – comings & goings of payments movers & shakers; CardWeb.com’s CardWatch® – ears & eyes on marketing globally (57K items); and CardWeb.com’s CardPixes® – form & function of card design (7K items).