PayPal Holdings Inc (NASDAQ: PYPL)November 10, 2019

I.

II.

III.

IV.

VI.

VII.

VIII.

V.

Table of Contents

1

Executive Overview

Overview of PayPal

Digital Payments Industry Overview

Investment Thesis I

Investment Thesis III

Catalysts & Risks

Valuation

2

3

5

7

8

9

10

12

Investment Thesis II

2

Company

Description

Investment

Highlights

Valuation

Recommendation

• An American company operating a worldwide online payments system that

supports online money transfers; an electronic alternative to traditional paper

methods, such as cash, checks and money orders

• The company acts as a payment processor for a variety of online vendors and

charges a fee in exchange for benefits such as one-click transactions and

password memory.

Queen’s Capital Recommends to Keep Stock on Watchlist

Executive Overview

• The company has an incredible growth potential across its payment ecosystem

• It is executing on its strategy of selectively acquiring companies to expand its

product offerings

• Venmo is a particularly interesting part of the business with an optimistic

monetization potential

• PayPal is an expensive stock compared to industry peers

• The intrinsic valuation also indicates it is overvalued right now

• Hold: Continue to monitor the company and look for an opportunity to Buy PYPL at

a cheaper price

3

Management Overview

Business Overview

Overview of PayPal

Revenue Breakdown

Strategy Overview

Business Description

• PayPal Holdings is a technology platform company enabling

digital and mobile payments for consumers and merchants

around the world

Value Proposition - Consumers

• Reduces transaction friction in payments and peer-to-peer

money transfers

Value Proposition - Merchants

• Quick onboarding process with no setup or recurring fees for

standard service

• End-to-end payment solution that provides authorization and

settlement with the potential for instant access to funds

• Online merchants realize higher conversion rates as users who

checkout with PayPal are less likely to abandon their cart

• Offers suite of services to businesses including lines of credit

• PayPal estimates that they already have a large share of the

increasingly competitive checkout market

• However, they view their value proposition as more of a

platform, rather than just a checkout button

• Constantly improving their core product by consistently reducing

payment frictions

• Engaging in strategic partnerships with companies such as

Uber, Instagram Shopping and Facebook Marketplace

• No intention of becoming a bank, but rather continue to expand

partnerships with banks

• Intends to innovate at the front end (cards, merchants,

processing) where they believe they can capitalize on higher

margins

Dan Schulman

CEO

John Rainey

CFO

Jonathan Auerbach

CSO

• Appointed CEO in in

July 2015

• Founding CEO of

Virgin Mobile

• Increased revenue by

4200% over 2-year

tenure as CEO of

Priceline.com

• Appointed CFO in

August 2015

• Previously CFO of

United Airlines

• 20+ years of financial

management

experience

• Appointed CSO in

Sept. 2016

• Previously held

executive roles at

McKinsey &

Company and Singtel

• 30+ years of relevant

experience

By GeographyBy Business Segment

89%

11%

47%

53%

Transaction Fees Other Fees USA International

4

Overview of PayPal (Cont’d)

Price / Volume ChartCapitalization Table ($mm, except for share

price)

Key Market Statistics

Share Price $101.4 52-Wk Range $75.47 -$121.48

Market Cap $119,086 Enterprise Value $114,101

LTM Revenue $17,127 LTM EBITDA $2,410

LTM P/E $50.31 LTM EPS $2.13

Share Price (7-Nov-2019) $101.40

Shares Outstanding 1,174

Market Capitalization $119,086

(-) Cash & Cash Equivalents $10,462

(+) Total Debt $5.477

(+) Minority Interest -

Enterprise Value $114,101

0

5

10

15

20

25

30

35

40

45

50

$0

$20

$40

$60

$80

$100

$120

$140

16-10-15 16-10-16 16-10-17 16-10-18 16-10-19

Mill

ion

5

60%18%

4%

18%

Market Share (Number of Websites)

Paypal

Stripe

Amazon Pay

Others

Highly Competitive Market Place

Digital and Mobile Payments Industry

Industry Overview

Sources: Company Reports, Datanyze

Swell in Global Mobile Payments Industry

Gateways

Acquirers

Card

Networks

Issuers

ISOs /

MSPs

PayPal Market

Share ≈ 60%

• The global mobile payments market was valued at $897 bn in

2018 and is expected to reach $3.7 tn in 2024, growing at a CAGR

of 27% over the period

• There are an increasing number of mobile devices, high-speed

cellular networks, data analysis tools and omni-channel vendors,

so e-commerce and mobile payments are becoming increasingly

important in the modern economy

• The companies in the space are rigorously investing in mobile

payment technology owing to significant growth

• e.g. WhatsApp working with ICICI bank to introduce mobile

payment feature through UPI (Unified Payments Interface)

• The industry is moving towards fragmented state due to the

increasing prominence and ease of use and entry of new players

that are still at an early stage (e.g. Apple Pay, Google Pay)

161 168 176 185 19343 46 48 51 54

134 144 156 170 18696 124

161209

270

4962

7490

111

2017 2018 2019E 2020E 2021E

Global Non-Cash Transactions ($bn)

North America LATAM Europe Emerging Asia CEMEA

6

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

2015 2016 2017 2018

PayPal Profitability Overview ($ million)

Net Income Gross Profit Revenue

Mobile Payments Business Model

Digital and Mobile Payments Industry

Industry Overview (Cont'd)

Sources: Company Report

Note: The Mobile Payments Business Model section refers only to PayPal because of a lack of available data for competitors

Evolving Technologies and Regulations

NFC, intuitive user surfaces, internal & external APIs, etc.Issues:

• Disclosure, reporting, anti-money laundering, capitalization, fund

management, corporate governance, privacy, data protection,

information security, banking security, taxation, sanction etc.

Government Controls:

• U.S. & EU Anti-Money Laundering and Counter-Terrorist

Financing

Consequences:

• Business inconsistencies, expansion delays, additional costs,

operation restrictions, potential lawsuits, etc.

Two revenue streams:

• Customer transaction process fees: 3.7% + $0.30

• Value-added services: interest fees earned on loans and interest

receivable

• Variable Purchase APR 25.9% (Min interest charge

$2.00)

Key expenses:

• Operating expenses: transaction expense (26% increase in

2018), general and administrative, transaction and loan loss,

marketing, restructuring

• R&D expenses: $1,100 mm, $953 mm and $834 mm in 2018,

2017 and 2016 respectively

3 key performance metrics:

• Number of active accounts – 267 mm

• Number of payment transactions – 9.9 bn

• Total payment volume (TPV) - $578 bn

Takeaway: Payment systems like PayPal do not challenge the fiat

currency system currently in place like cryptocurrencies or

Facebook’s Libra does, easing the regulatory challenge for

governments

46%

13%

7

PayPal’s Number of Acquisitions

Acquisition of iZettle in May 2018 for $2.2 bn

Robust Acquisition Pipeline

Investment Thesis I

Acquisition of GoPay in Sep 2019 for 70% Stake

Sources: Company Reports

Global Coverage of PayPal and Subsidiaries

Company Overview:

• Provides small-business tools and a payments platform that is

widely used across Europe and Latin America

• The platform is used by 500k+ businesses, supplying mobile

card readers, invoicing software, POS systems, and offering a

suite of smart analytics

• Most popular product is the iZettle Reader

• Considered the “Square” of Europe

Synergies:

• Expansion in Europe and Latin America

• Expansion in small-business services

• Expansion into brick-and-mortar physical retailers

3

1

4

0

4

0

2

3

1

2011 2012 2013 2014 2015 2016 2017 2018 2019

“We have a healthy balance sheet and we are ready to put it to

work to buy more companies… we are ready to invest up to $3

billion a year on acquisitions” – CEO Daniel SchulmanOnly

PayPal

PayPal With

SubsidiariesGoPay

Company Overview:

• GoPay has licenses for online and mobile transactions, and

provides payment products for industries including e-commerce,

cross-border commerce, and aviation

• Partner with China's financial institutions and technology

platforms, providing comprehensive payment solutions to

businesses and consumers in China and globally

Synergies:

• PayPal will be the first foreign payment platform to provide

online payment services in China

• Expansion in China, where PayPal does not operate in

• Mobile payments market is expected to grow 21.8%, from 2017

to 2023, resulting in a ~$97 tn market size

No PayPal or

Subsidiaries

8

Key PayPal Milestones

Overview of Venmo

Growth and Success of Venmo

Investment Thesis II

Total Payment Volume ($bn)

Sources: Company Reports

Mobile P2P Payments Adoption by Generation

• PayPal acquired Venmo as a subsidiary of their acquisition of

Braintree in December 2013 for $800 million

• Venmo offers peer-to-peer (P2P) payments through their mobile

app, where users can charge people money, pay them, and split

bills using the platform

• Popular among millennials, who are constantly transferring

small sums of money and enjoy an app that is very easy to use

and fast to process payments

• They are the market leader in peer-to-peer payments in the US,

with major banks lagging in creating their own mobile payment

app

• Free to use for debit cards and bank accounts, credit cards

carry a 3% fee

3.2 3.94.9 5.6

6.88.0

9.410.4

12.314.2

16.7

18.8

21.0

24.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2016 2017 2018 2019

26%

34%

25%

10%11%

20%

14%

5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Young Millennials(21-29)

Older Millennials(30-38)

Gen Xers(39-53)

Baby Boomers(54-72)

Venmo

Zelle

October 2017: More than 2 million U.S. merchants enabled to

accept Pay with Venmo

January 2018: Launch of instant cash out on Venmo

April 2018: Grubhub adds Venmo as a payment option

June 2018: Launch of Venmo debit card

July 2018: Uber adds Venmo as a payment option

March 2019: Chipotle partners with Venmo to give away money

and have a custom Chipotle emoji when transfers are made

October 2019: 35% of active users have engaged in a

monetizable experience

9

Gen Z: Monthly Use of Digital Payments

Payments Beyond the Transaction

Strong Ecosystem for Money Transfer and Handling

Investment Thesis III

PayPal SMB Lending Results

Sources: Company Reports and Investor Presentations

The Role of Gen Z

• Holding $44bn in global buying power and projected to make up

40% of the U.S. consumer base by 2020, Gen Z are the

payments industry’s future consumer base

• Disruptions in the traditional payments ecosystem are driven by

younger consumers, who are forging their payment habits

around digital products such as PayPal

• 68% of Gen Z consumers are interested in instant P2P

payments – more than any other age group

• 69% of Gen Z consumers use mobile banking apps daily,

compared to the 17% of Baby Boomers

• Displays a massive generation gap in banking preferences that

will continue to grow, forcing traditional players to up their digital

offerings value for survival

• With PayPal and Venmo dominating the digital payments

ecosystem, anyone can be a merchant and any device can be

an acceptance device

• Payments that were location bound are now device enabled

• Merchants, especially small and medium businesses (SMBs),

are attracted by efficient online payment methods

• PayPal provides other value-adds to SMBs, including fraud

prevention, data analytics, and risk management

• Unlike traditional banks, PayPal offers an array of credit

products to SMBs, addressing specific pain points: access to

credit and lengthy application processes, causing a recalibration

in the traditional payments network

• SMBs using PayPal for working capital loans see an average

growth rate of 21%, with 88% of borrowers seeing growth in the

first three months

30%

11%

13%

46%

Never

10+ times

6-10 times

1-5 times

0.5

2

3

6

10

0

50,000

100,000

150,000

200,000

250,000

0

2

4

6

8

10

12

2015 2016 2017 2018 2019

Cumulative Volume ($bn) Businesses Served

10

Catalysts

Sources: PayPal’s Q3 Investor Presentation, Worldpay’s 2018 Global Payment Report

Monetization of Venmo’s User-base Global E-Commerce Payment Share

Growing List of Key Corporate Partnerships

• PayPal’s ability to monetize Venmo users has lagged the

incredible user growth that Venmo has shown

• Venmo has been a drag on PayPal’s margins, but that is

beginning to change

24%

29%31%

33%35%

Q3 Q4 Q1 Q2 Q3

2018 2019

Venmo’s % of Monetized Users

PayPal recently struck a large deal in order to be the lead payment

processor for Uber by investing $500 million in the company ahead

of the IPO earlier this year

✓ PYPL was up 2.0% a week after the announcement date

PayPal also became a payment partner for Instagram’s new social

shopping experience

✓ PYPL was up 1.6% a week after the announcement date

Another partnership that PayPal closed in 2019 was with

MercadoLibre, which is considered the “eBay of Latin America”

✓ PYPL was up 4.1% a week after the announcement date

36%

47%

23%

17%

12%

11%

11%

11%

8%6%

5% 3%

2018 2022E

PrePay

eInvoices

PostPay

Pre-Paid Card

Cash on Delivery

Charge & Deferred DebitCard

Bank Transfer

Debit Card

Credit Card

eWallet

In the short-term, monetizing Venmo and adding corporate

partners will increase Venmo’s stock price

In the medium-term, this industry trend will help increase

PayPal’s prominence in the fastest growing retail segment

11

PayPal is now exposed to the same risks as the world’s largest financial institutions

Risks

Growing Competition

• The global payments industry is highly competitive, very innovative,

and the industry is increasingly being subject to regulatory scrutiny

• Larger businesses in the same industry with a more dominant

market position may be able to respond more quickly to these

regulatory and technological changes

User Security and Reputation Risk

• The collection, storage, processing, and transmission of customers’

personal and financial data is fundamental to PayPal’s business

• PayPal’s reputation is built around it being a secure and effective

way to make payments

• In 2016 and 2017, hackers launched attacks against PayPal and

other internet-based companies to attempt to gain unauthorized

access to user data

• These types of hacks are becoming increasingly sophisticated, and

a successful and major hack of PayPal’s trove of personal data

could severely damage its reputation with its users

Global and Regional Economic Conditions

• PayPal’s operations are greatly dependent on economic conditions

regionally and globally

• Factors that may cause PayPal’s financial performance to

deteriorate are:

• Tighter credit

• Higher unemployment

• Consumer debt levels or reduced consumer confidence

• Financial market volatility

• Forex and interest market fluctuations

• Shutdown of U.S. federal government

Reliance on Third-Party Providers

• PayPal is dependent on banks and other payment processors to

process transactions

• Occasionally, payment card networks have increased fees that they

charge for each transaction that uses their network

• These networks have previously imposed, and could impose in the

future, special fees for transactions that pass through “digital

wallets,” which would increase PayPal’s costs

• To counter the risk, PayPal has strategic partnerships in place with

Visa and Mastercard and other credit card networks that prohibit

these partners from imposing fees that solely target PayPal, but

these strategic partnerships have expiration dates

Highly

Likely

Not

Likely

Low Impact High Impact

R1

R2

R3

R4

R1

R2

R3

R4

12

Discounted Cash Flows

Valuation

Notes: Separated Transaction expenses and Transaction and loan losses from operating expenses and put them in COGS

Free Cash Flow Analysis Historical Data Near-Term

Fiscal year 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E Terminal Year

Revenue 10,842 13,094 15,451 17,644 20,732 24,360 28,258 32,214 36,724

COGS 4,434 5,430 6,855 6,851 8,758 10,291 11,925 13,594 15,498

Other Operating Expenses 4,822 5,537 6,402 8,066 8,859 11,157 12,942 14,754 16,820

Operating Income (EBIT) 1,586 2,127 2,194 2,727 3,115 2,913 3,391 3,866 4,407

Net Income 1,364 1,744 1,909 2,424 2,676 2,502 2,913 3,321 3,786

Plus: D&A 724 805 776 904 1,191 1,399 1,623 1,850 2,109

Less: CapEx 669 669 820 792 1,146 1,340 1,554 1,772 2,020

Less: Increase in NWC 1824 927 (2723) (217) (627) (589) (630) (642) (732)

Unlevered FCF (405) 953 4,588 2,754 3,347 3,150 3,612 4,041 4,607 132,203

Discount Rate 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 10.8%

Discount Period 0.25 1.25 2.25 3.25 4.25 5.25 5.25

PVFCF 2,697 3,017 2,613 2,758 2,839 2,979 77,163

Growth Y/Y %

Revenue 17.2% 20.8% 18.0% 14.2% 17.5% 17.5% 16.0% 14.0% 14.0% 5.0%

EBIT 8.6% 34.1% 3.1% 24.3% 14.2% -6.5% 16.4% 14.0% 14.0%

Key Ratios

COGS (% of Sales) 40.9% 41.5% 44.4% 42.2% 42.2% 42.2% 42.2% 42.2% 42.2%

Other Operating Expenses (% of Sales) 44.5% 42.3% 41.4% 45.7% 45.8% 45.8% 45.8% 45.8% 45.8%

Tax Rate 14.0% 18.0% 13.0% 11.1% 14.1% 14.1% 14.1% 14.1% 14.1%

Depreciation & Amortization 6.7% 6.1% 5.0% 5.1% 5.7% 5.7% 5.7% 5.7% 5.7%

Capital Expenditures (% of Sales) 6.2% 5.1% 5.3% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%

PV of Forecasted FCFs 16,903

PV of Terminal FCF 77,163

Total PV of FCFs 94,065

Value of Cash 10,462

Value of Debt 5

Total Equity Value 104,522

FD Shares Outstanding 1,174

Intrinsic Value/Share 89

Current Share Price 101

Upside % (12.2%)

Gordon Growth Method

PV of Forecasted FCFs 16,903

Terminal Value

Terminal Year EBITDA 6,516

EBITDA Multiple 20

Terminal Value 132,203

PV of Terminal Value 85,487

Enterprise Value 102,390

Less: Net Debt (10,457)

Total Equity Value 91,933

FD Shares Outstanding 1,174

Intrinsic Value/Share 78

Current Share Price 101

Upside % (22.8%)

Terminal Multiple Method

13

Comparable Companies Analysis

Valuation

Key Takeaways:

• PayPal and its competitors are trading at very high multiples, reflecting the strong historical and projected growth for the industry

• PayPal has demonstrated consistently strong return on equity, although it still lags the two powerhouses (Visa and Mastercard)

• PayPal’s size and market share are reflected in the higher multiples it receives compared to smaller industry counterparts

US$ millions, except per share dataPrice / FCF

Price /

BVROE

LTM 2019E 2020E LTM 2019E 2020E LTM 2018

Mastercard Incorporated 278,779$ 281,246$ 16,276$ 35.0x 31.2x 31.0x 41.2x 36.0x 27.9x nmf 110%

Visa Inc. 387,222$ 397,339$ 22,977$ 28.4x 28.4x 28.1x 27.8x 24.9x 19.5x 12.0x 32%

Global Payments Inc. 50,874$ 59,052$ 3,805$ 27.7x 24.1x 26.0x 15.7x 24.2x 20.8x 1.8x 20%

FIS Inc. 81,091$ 99,996$ 9,158$ 23.8x 21.7x 16.4x 20.5x 19.1x 17.8x 1.7x 9%

Median 179,935$ 190,621$ 12,717$ 28.0x 26.3x 27.1x 24.2x 24.5x 20.1x 1.8x 26%

Mean 199,492$ 209,408$ 13,054$ 28.7x 26.3x 25.4x 26.3x 26.0x 21.5x 5.2x 43%

PayPal 120,719$ 115,734$ 17,037$ 32.9x 30.1x 29.2x 26.8x 26.8x 22.7x 7.2x 17%

Market

Capitalization

Enterprise

Value

Total Revenue

LTM

Price / Earnings

14

Summary

Valuation

$30 $40 $50 $60 $70 $80 $90 $100

Price / Earnings LTM

Price / Earnings 2019E

Price / Earnings 2020E

Price / FCF LTM

Price / FCF 2019E

Price / FCF 2020E

DCF: Gordon Growth Method

DCF: Terminal Multiple Method

Key Takeaways:

• PayPal seems overvalued relative to its industry competitors

• The intrinsic valuation is much closer to PayPal’s current share price, and with less conservative assumptions the current share price

seems reasonable

• PayPal will need to fulfill its strong growth potential to live up to its current market valuation

PYPL stock price = $101.42

15

Asher Levinson Vanessa Liu Domenico Tullo Matt Walker

Senior Portfolio Manager

Queen’s Capital

Portfolio Manager

Queen’s Capital

Analyst

Queen’s Capital

Analyst

Queen’s Capital

Thank You

Queen’s Capital Financial Institutions Group

Elizabeth Kim

Analyst

Queen’s Capital