PayPal Has Traditional Banks Scared as the Ultimate Fintech Grows Up

Editor’s Note: This article was updated on Dec. 13, 2021, to correct the list of Paypal’s subsidiaries.

PayPal (NASDAQ:PYPL) is the ultimate fintech. It’s a player in nearly every fintech niche. Wanna buy now, pay later (BNPL)? Got it. Bitcoin? Got it. A digital wallet that lets you trade stocks? They’ve got that, too.

PayPal (PYPL) logo overlays daylight photo of corporate building
Source: JHVEPhoto / Shutterstock.com

Yet PayPal stock is down for the year, by 18%. That’s because it’s now a fully grown banking operation. It has a market cap of $225 billion. It’s on pace for revenue of $25 billion this year. It’s still growing, by nearly 20%, but bigger numbers grow slowly, and bank stocks don’t get fat multiples. At Friday’s closed, PayPal was trading at 45.3 times earnings, more than four times what bank stocks trade at.

Lender multiples are more like the 10.1x for JPMorgan Chase (NYSE:JPM) and 10.6x of Citigroup (NYSE:C). But PayPal and it fintech brethren have the banks worried. Just last week, JPMorgan co-president and COO, Daniel Pinto. became the latest executive to weigh in on the increasing threat of fintech firms, Business Insider reported. “At a lot of the banks, we kind of slept at the wheel and allowed this to grow,” Pinto said referring to the dominance of payments competitors such as PayPal, Stripe, once-Square-now Block (NYSE:SQ) and others.

Pounding the Table on PYPL Stock

The recent fall in PayPal’s price has many people pounding the table for it, telling investors to buy now.

PayPal’s chart pattern is like that of Fiserv (NASDAQ:FISV), a payment processor, say the bulls. It should be more like a fintech such as BNPL leader Affirm (NASDAQ:AFRM), up 39% since coming public in January. PayPal is launching a “super app,” a digital payments wallet that includes stock trading, cryptocurrency and even messaging.

PayPal’s big advantage has been low fees for both payors and recipients. Because it’s a unitary system, it translates between currencies in an instant. There’s no charge for recharging your account. Once you get into the system, PayPal has a host of profitable subsidiaries you can use. Online coupon generator Honey is PayPal. So is Xoom. Venmo is also PayPal.

PayPal has margins banks can only dream of. Of every $5 that came in during the third quarter, 21 cents became net income. Banks make their money by lending it for more than they pay. PayPal makes money for moving money around, so its books are those of an operating company.

The Bear Case

To PayPal bulls, the stock’s fall since July, when it traded at $305, is a mystery.

It’s not a mystery. the San Jose-based company’s last two earnings’ releases were called “disappointing.” Its outlook for the fourth quarter is conservative. Shares doubled during the worst of the pandemic and were due to cool off.

Growth must slow down as PayPal gets bigger. Revenue there usually grows at around 13% per year. In 2020 it grew by 25%. It should be up by 21% this year. The company is guiding toward even slower growth next year.

Even with its recent fall, PayPal is still priced like a tech stock. It’s all about growth. If growth is slowing, if business is going back to normal, then PayPal must fall.

Behind the Pinterest Rumor

Then there’s Pinterest (NYSE:PINS).

PayPal was rumored to be buying Pinterest, a DIY and crafts discovery site, back in October. It threw cold water on the reports in early November. But this left some analysts scratching their heads, wondering whether PayPal’s C-suite had lost its mind.

It hadn’t. But it has become interested in the metaverse, in blockchain and NFTs. Moving from digital payments to digital currency, and digital assets, is risky business. Wall Street likes risk only when it pays off.

Aggressive Investors See Opportunity

PayPal is for aggressive, growth-oriented investors.

Even deals like the recent tie-up between its Venmo unit and Amazon (NASDAQ:AMZN) aren’t guaranteed to move the needle.

To maintain its growth rate, PayPal will have to do $30 billion in business next year, and $36 billion in 2023. Bears worry that this means going into riskier, fully digital assets, rather than just moving money.

It doesn’t have to. The coming end of the pandemic should boost international trade. This could provide a big kicker to PayPal’s numbers. BNPL will provide another kicker.

If you’re an aggressive investor, you can see PayPal as a buying opportunity at its current price. If you’re conservative, stay with the banks.

On the date of publication, Dana Blankenhorn held long positions in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays he has a collection of COVID-19 stories at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.


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