Secondly, this is of course a disruption of the global supply chain which has generally led to a slowdown in global E-commerce. Overall, eBay put $1.4 billion of pressure on our top line, reducing our revenue growth by 700 basis points. eBay's migration to managed payments happened faster than we anticipated. In the case of PayPal, we are probably not dealing with one extraordinary risk, like in the case of Alibaba ( BABA), but with a combination of micro and macro risks that coincided in time. Therefore, potentially extremely high risks should not be here. Given that PayPal has been generating profits for the past six years and revenues continue to grow exponentially, we should conclude that we are dealing with a company in the "High Growth" stage. The main point here is that a company that is in the "High Growth" stage is the least exposed to risks overall: In this article, he offers an interesting systematization of risks and also explores which risks a company is more exposed to, depending on the different stages of its life cycle. I am a follower of the blog of professor of finance Aswath Damodaran, and right now, I am reading his article on investment risks. In other words, perhaps high risks determine the current, relatively low price of PayPal. But if we assume that now there are additional risks of investing in PayPal, then we will have to revise the discount rate, and then we can build a new DCF model that, given adequate parameters for future development, will show a neutral growth potential for the company's price. In the previous block, I built the model based on the discount rate (or WACC) of 6.3%, which is generally at the level of the average for the PayPal industry. I propose to consider this hypothesis unlikely and dig further. So, only assuming a catastrophic deterioration of the PayPal business, we can conclude that the current price is justified. Here is the calculation of the Weighted Average Cost of Capital: This is the level of retail companies.Īlso, I had to assume that PayPal would approximately double the relative amount of capital expenditures. Analysts' current average expectations suggest that this figure will quadruple.įurther, in order to achieve the desired result, I had to assume that the company's operating margin would decline from the current 17% to 4% in the terminal year. So, this model is based on the assumption that, in the next 10 years, the company's annual revenue will only double. If you think this scenario is likely, then you probably shouldn't buy PayPal at the current price. In other words, I want to show the scenario of the company's development, which corresponds to its current price. Today, I will build a model that assumes zero growth potential for PayPal's capitalization. However, this model was based on my vision of the future development of the company, which is quite subjective. In general, it is very clear, in one figure, to express how much the company can generate free cash flow in the future.Īt the beginning of the month, I already published such a model, which indicated a more than 200% undervaluation of the company. Because this approach allows you to bring together the qualitative and quantitative growth potential of the company, as well as take into account the risk and today's cost of capital. What if today's price is fair?Īmong financial analysis tools, I trust the discounted free cash flow method the most. Agree, there must be a reason for such a discount. In other words, PayPal, which reported annual revenues of $25.3 bn, is now worth as much as it was when it generated $15.9 bn a year. Therefore, if you look at the dynamics of the company's capitalization in the context of the dynamics of its revenue, it turns out that now PayPal is at the level of the first quarter of 2019: In the stock market, price is not a function of time but a function of a company's financial performance. But I do not think that, in this case, such an analogy is appropriate. PayPal's ( NASDAQ: PYPL) share price is down over 60% from its peak in July 2021 and is now at its early 2020 levels. Spencer Platt/Getty Images News How deep has the price fallen?
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