The world continues its march towards “cash”-less payment connectivity.

Credit cards were the early forerunners of a paperless payment system. Since then, payment systems have gone digital.

Today, we can pay for a transaction with a tap of a card or a phone, get a receipt emailed instantly, and a merchant can process transactions without opening a cash drawer.

While digital payment can sometimes seem ubiquitous, its growth is far from over, as technological advancements extend it to more rural and smaller merchants globally.

In 2025, the total transaction value of digital payments is expected to be approximately $20 trillion.

By 2029, this value is expected to nearly double to $37 trillion, a 16% annual growth rate.

Moreover, with the pandemic fundamentally altering consumer shopping patterns, the world is likely to see more payments shift online, and more vendors may look to sell globally to access underpenetrated, fast-growing digital markets.

Mobile commerce made up roughly 57% of all e-commerce sales going into the pandemic. In 2024, it eclipsed a 60% share, and all trends indicate more and more transactions will move to mobile phones.

Meanwhile, with social media fueling more global connectivity, B2C cross-border transactions are expected to rise from approximately $785 billion in 2021 to $7.9 trillion in 2031, a 10x return in a decade.

Companies that are set up to fuel this scaling and increasingly complex ecosystem could skyrocket going forward.

Legacy e-commerce facilitator PayPal (PYPL) is well-positioned to enter a new chapter of growth.

PayPal (PYPL), became a household name, in large part, by facilitating payments and collecting interest for e-commerce giant eBay (its parent company until 2015).

This legacy in digital payments should position it well to benefit from long-term transaction tailwinds.

The company became a beacon of trust in the somewhat dodgy early e-commerce world, offering secure payments, smooth online integration, and a global reach.

Following its spinoff, PayPal was able to pursue opportunities with other platforms, allowing it to become a high-flying stock until late 2021 when it faced a reckoning, its lucrative business with eBay was fading.

eBay had pursued partnerships with other payment platforms to take payments back in-house, throwing PayPal back into direct competition with many payment options.

Meanwhile, the post-pandemic growth rate of e-commerce had started to normalize, resetting expectations for PayPal’s growth.

PayPal’s acquisition of expensive, high-growth, but low-profitability companies in an attempt to build a broad fintech ecosystem was increasingly shunned by investors. This resulted in the company’s Uniform return on assets ”ROA” dropping from 37% in 2022 to 25% last year.

Furthermore, PayPal’s stock dropped by more than 75% from its peak in less than a year.

In 2023, the company decided to change course, hiring Intuit’s Alex Chriss as CEO. Chriss turned to transforming PayPal’s business, away from “growth” and back towards “profitable growth.”

PayPal’s shift in strategic focus should lift profitability while maintaining growth.

In recent years, PayPal has taken steps to move away from its less profitable and largely commoditized unbranded payments business (where the company white-labels its software for companies such as Uber and Airbnb) and towards its core branded payments businesses.

This move should allow the firm to leverage strong brand recognition and consumer trust for services like PayPal and Venmo to increase margins, find new monetization pathways, and maintain a healthy take rate from transactions.

While this decision to temper unbranded growth spooked some growth-focused investors, it should set up PayPal to be a more profitable cash flow machine in the long run.

Despite strong profitability and impressive growth, and a shift in its strategic direction that appears more measured and sustainable, PayPal trades well below market averages at a 14.4x Uniform P/E.

Markets appear to be underestimating the firm’s ability to maintain a dominant position in the e-commerce space amid mounting competition.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s ROA to further decline to 17%, not pricing in the recovery in profitability.

The firm’s growth remains healthy. Its total payment volume climbed by 10% in 2024, its transaction margins increased by 5%, and both its active accounts and payment transactions per account continued to scale.

PayPal’s immense profitability, healthy growth, and tame valuations combine for an attractive investment proposition.

As such, the company appears to have upside potential and could be an interesting name to add to an investment portfolio.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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