A Deep Dive on PayPal

In today's episode of Motley Fool Money, host Chris Hill welcomes Motley Fool analyst Jason Moser and Motley Fool contributor. Moser and Frankel do a deep dive on PayPal. Also, Motley Fool analyst Maria Gallagher discusses:

• Nvidia (NVDA 6.18%) wrapping up the fiscal year with strong results across the board.
• DoorDash (DASH 3.12%) increasing orders as well as the amount of money spent per order.
• Surprisingly strong guidance for DoorDash's 2022.
• Whether Cheesecake Factory (CAKE 1.36%) has pricing power.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 17, 2022.

Chris Hill: Today, we're running the gamut from graphics processing units to cheesecake. That's not a euphemism by the way, talking to actual cheesecake. Motley Fool Money starts now. I'm Chris Hill and joining me is Motley Fool Senior Analyst Maria Gallagher. Thanks for being here.

Maria Gallagher: Thanks for having me.

Chris Hill: We're going to look at the restaurant industry from two different angles. Let me start with this, because I've said over the past few weeks, investors should not expect any company to get the benefit of the doubt. For whatever reason, this is the environment we're in right now. The latest example is NVIDIA, because NVIDIA wrapped up its fiscal year with a revenue higher than expected. Their guidance for 2022 was good and the stock is down eight percent this morning. The graphics chip-maker is crushing it, and no one's getting the benefit of the doubt, and this is why we can't have nice things, Maria. This is why we as investors can't have nice things.

Maria Gallagher: I think we're seeing this environment where even strong guidance, even consistency, it's just not enough, so revenue for the quarter was up 51 percent, revenue for the year was up 61 percent, breaking it down a little bit even more, gaming results for the quarter were up 37 percent, up 61 percent for the year. If you look at their data center results, those were up 71 percent in the quarter, up 58 percent in the year, something really cool with that as well with a team of Stanford researchers at the world record for the fastest DNA sequencing of the human genome using NVIDIA Clara. There are a lot of these really fascinating achievements being made utilizing these chips, and so then you have in their professional visualization section, those that was up a 109 percent in the quarter, a 100 percent over the year. 

So actually, out of all of their reporting segments, the only segment that was down was automotive and robotics, which is one of their smaller segments and their revenue for the quarter was down 14 percent, but up six percent for the year. That was largely due to supply constraints with automakers, not necessarily on video as part. So what we're seeing is, you have the CEOs talking about how they are seeing exceptional demand because their chips are useful in all of these applications. They are seeing demand everywhere and their supply constraints are easing. So their supply is going to increase substantially in the second half of this year. Not only did everything look really good from a number standpoint from this quarter, we're seeing in the future or seeing pent-up demand for the chips all around good news in terms of how the supply is going to meet that demand and it's still, like you said, just doesn't quite seem to be enough.

Chris Hill: One more reason I'd like Jensen Huang, the Co-Founder and CEO that you referred to talked about the deal for Arm, and just being like,"Yeah, we tried, it didn't work." I appreciate any time as CEO is straightforward with us as investors and Wall Street as well. Do you look at this as a buying opportunity? I almost hate to put it in those terms but I look at the strength of this business, as you said, pretty much across the board, every division is growing the way you would want it to. It seems like for those who have looked at NVIDIA and thought, "It's such a big company." For whatever reason, it's on their watch list, but they haven't pulled the trigger. Today seems like a little bit of a gift.

Maria Gallagher: Yeah, I would think so. I will say with the termination of the Arm agreement, they did have to write-off operating expenses of 1.36 billion, which is not really a throwaway number, but for a company this size growing this much I guess. Some people think it is and it can be in the long run, but like I said, NVIDIA is one of these fascinating companies because it touches so many things in so many different ways and is so integral to the existence of so many things. So you have examples of partnerships with MADUP, partnerships with Tesla, with NIO, with these Stanford researchers, University of Illinois researchers. So they're being used by everyone all the time and so it's one of these things that I like it, I think it's a personally one I have always had on my watch list and have never pulled the trigger. So maybe to me, I'm going to spend more time digging it to in the next couple of days.

Chris Hill: This is why we can't have nice things. DoorDash got nearly 370 million orders in the fourth quarter and people are spending more on their orders. Shares of DoorDash are up today. So I guess DoorDash can have nice things. But you zoom out, the stock is basically been cut in half over the past year. When you look at the business like DoorDash, what do you find your eyes gravitating toward?

Maria Gallagher: What I think is fascinating with DoorDash is, so you have their users, and then you see where they think those users are growing, because what these brands are doing, what these companies are doing, they're fighting to become integrated into consumers lives. They don't want to just be your thought for when you want Chipotle, they don't want to just be your thought for when you went to Shake Shack, they want you to be thinking of them all the time constantly because when they become ingrained in your life, you are a very loyal user. So what they're doing is they're trying to expand and hope that this happens, and you can get anything now on DoorDash. You have partnerships with Bed Bath & Beyond, you can get really whatever you want. So their monthly active users were 25 million, which was up 22 percent. Their DashPass members exceeded 10 million. They said many markets last quarter, so over 20 percent of these users placing orders in non-restaurant verticals and that's what they are really trying to emphasize is they increase over the long term. They spend as a whole in the marketplace once you integrate the non-restaurant verticals with the restaurant verticals and they are trying to get those customers to stay because what you see in this area is, I think this area is really interesting. I think that the area is going to continue to grow, but there's not a ton of loyalty if you're comparing, well, I have DoorDash, I have Uber Eats, I have Grubhub, I have whatever is cheapest. They're trying to institute a way to get people to be loyal to them. So following those numbers and those breakdown of users and how much they're spending on the platform is really fascinating for me when I look at them.

Chris Hill: Thank you for speaking to the loyalty piece of this. Because while you were talking, I was thinking about how to a large degree I don't really care who is delivering the stuff to my house. Whether it's food or packages, I care that it gets there. I care it gets there in a timely manner or whenever they say it's going to get there. But I don't really feel a strong sense of loyalty. What is DoorDash doing to engender that type of loyalty? Not just with customers, but also with corporate partners, whether it's Bed Bath & Beyond or someone else. Because it would seem like if you're Bed Bath & Beyond, you also have choices in terms of who is going to help you deliver products to people's homes.

Maria Gallagher: It's all about deals. You have deals on the DashPass if good deals with Bed Bath & Beyond, with Shake Shack, with all of these different customers and merchants, and what that ends up doing is making DoorDash itself less profitable, but for their long-term goal is saying, if this works and the scales, eventually, it'll be profitable. In terms of these ideas of, you're cutting deals for everyone so that you are the cheapest platform to be on or the platform that gives the most. They have tiered pricing for their merchants rates, so they give the most bang from a merchant standpoint. They're really trying to fight to get both the merchants and the customers to really want to be on the app, and then you have the additional layer of trying to get the dashers to be on the app. There's no incentive for a driver to just drive for DoorDash when they can also drive for Uber Eats. It's a difficult challenge to try and get all of these three different groups of people to choose you consistently and ingrain you into their lives. It's a big challenge. I think that they are doing their best, you can see them integrating new pricing strategies, working on being integrated in people's lives, but I think it's going to be difficult, especially in the competitive environment they're in.

Chris Hill: Their guidance for 2022, surprised me a little bit for two reasons: One, I don't think there's any incentive to be overly ambitious with your guidance, whether you're strong business like NVIDIA or a stock that is struggling, like DoorDash. That's one thing. The other thing is all of the indications that we're getting, it seems like every day we're getting a new data point about the world opening up again, whether it's companies announcing their offices are opening up, Disney world lifting their mask mandate. Cities doing the same thing, schools, restaurants. That would seem to board well for restaurants, and businesses, and not as well for delivery businesses.

Maria Gallagher: I would agree, and that's what they are trying to, and I think that's a big thing too with their non-restaurant orders, or they're trying to say, well, it's not just food you can get anything you need. So as the world opens up, maybe you are busier than you used to be, maybe you need your Bed Bath & Beyond delivered because you have all your weekend plans. I think that's what they're trying to do, is they're trying to focus on the fact that they have, now everything you saw I don't know if you saw that Uber Eats, their advertising, I think it was in the Super Bowl. I just saw it on YouTube where you could see everyone was trying to eat their things from Uber Eats but they're trying to say, "Look, we can send you anything now," and DoorDash is doing the same thing. I haven't seen as fun of an app from them, but it's the same concept.

Chris Hill: No, it's a great ad, but the first time I saw it, it wasn't completely clear to me what deliveries was trying to get across, and then upon a second and third viewing I said, "Oh, OK, yeah, it's Uber Eats." So the delivery brand is Uber Eats, but we'll deliver things that aren't edible as well. We'll see how it plays out for them and for DoorDash. Let's stick with the restaurant piece of this for a second because like all restaurants, Cheesecake Factory is dealing with higher input costs. But their revenue in the fourth quarter was higher than expected. They say they are planning to raise prices on their menu. Does Cheesecake Factory have pricing power? They seem to think they do.

Maria Gallagher: Well, depends on what menu items you're looking at because that you have 235 options. If you go to Cheesecake Factory, you can get 235 things from their menu. If anyone's familiar with a lot of the jokes around Cheesecake Factory, that's why it's because they have so many. They have over 60 just desert sections. They have 208 company-owned factories, 29 internationally licensed, so a bit bigger than I would've thought. What's interesting is that they're really as many restaurants in the past two years, they're trying to get people to choose Cheesecake Factory when they're at home, not for the ambiance of going to the Cheesecake Factory. They've had this growth in off-premise sales, they are now about 27 percent of their overall sales. What's also pretty interesting is it also owns the restaurant change, North Italia and FRC, which is Fox Restaurant Concepts. What they're saying is they're trying to see a lot of future growth from there. North Italia has 29 locations, they want to build that out to 200. FRC, they want to have as an incubation, innovating concepts for the future of different types of restaurants, so that's 59 current locations. 

They're trying to grow both of those about 20 percent from a unit growth over the next 10 years. What's really interesting is that they have the Cheesecake Factory. That's going to keep growing. Maybe, like you said, the leverage is there is that they can increase their prices. They still don't want to get too expensive because they're that option when people go and say, we don't want to spend too much but we want to have a nice meal, we can go there. But what they are also seeing is they're going to try and grow through those other brands as well. I think it'll be interesting to see as people recover if there's that strength there, but they're arguing is that there's a strength in chains, and they're trying to say we're the chain that people trust in these ways, there's the strength in that when you've seen so many restaurants closed in the past two years. When you have these chains you have that more financial ability to stay open and withstand those hard times. I think that's a fascinating argument to make and it will be interesting to see how that plays out for the next couple of years.

Chris Hill: The Wall Street Journal had a story today about destination weddings and how that business is starting to ramp back up. Part of the optimism around that is, people have been cooped up for two years. They've put their lives on hold for two years and they're saying the hell with it, I'm going to go and I'm going to spend this money. For higher-end restaurants, I could see it for a restaurant like Cheesecake Factory too as well where people say, "Yeah, I just want to go to the restaurant, I just want to have a good time, I'm not particularly concerned with the price of the meal." I mean, I knew the menu was big, 235 items? What? Every one of them is equally as good?

Maria Gallagher: Exactly. It's too many things to do them all well. Also if you look at their photos of their integrated bakery, it has the worst photos of cheesecake I've ever seen, which is not a great sign for them. But they have over 60 cheesecakes, I think it's too many. You can't do all of those things well, just stick to one, do it well, 235 menu options is too many.

Chris Hill: I hate to use this word, but are you a little pickier with your cheesecake because you're a proud child of New York City?

Maria Gallagher: I actually don't like cheesecake.

Chris Hill: Oh, OK.

Maria Gallagher: My sister loves Oreo cheesecake. She always has it for her birthday, which is only a bummer for me because they don't really like it, I think my sister is.

Chris Hill: But you have a slice. You have a slice because you're a good sister.

Maria Gallagher: Yeah, I'll eat the Oreo part.

Chris Hill: Maria Gallagher, great talking to you. Thanks for being here.

Maria Gallagher: Thanks so much for having me.

Chris Hill: Some stocks like NVIDIA take a hit, even though they're posting strong results. But to be fair, some stock drops are for perfectly valid reasons. Up next, Matt Frankel and Jason Moser discuss a financial company whose stocks been beaten down but the underlying business maybe showing similarities to Berkshire Hathaway and Apple.

Jason Moser: Well, Matt, thanks for joining me this week. Excited to talk with you because we get to talk financials again this week and we're talking a company and specific one that we talked about a lot over the last several years, and that's PayPal (PYPL 2.90%). It's been in the headlines here recently, stock having a not so good year, Matt. Stocks down 40 percent year-to-date and a lot of that was really the result of the company's most recent earnings report, which we'll get to in a minute. But before we do that, let's remind our listeners exactly what PayPal is because it's a big business, and as you and I know, it's not just PayPal, it's a lot more.

Matt Frankel: Right. PayPal is best known as the online payments giant. It's the way you pay for things and all your favorite websites, it handles payment processing for a few million merchants around the United States and around the world. But there's also the Venmo personal finance app that facilitates money transfers, direct deposits, things like that. They also have a buy now pay later service. There's a lot more to the business that people will just see. For example, PayPal is a big investor, as we've talked about several times. They own stakes at a lot of our favorite businesses like MercadoLibre and Uber, just to name a couple. They have a venture capital division. They're like a big fintech ecosystem that tries to capitalize on all of these trends. There's a lot more than just the PayPal side of the business.

Jason Moser: Feels like you're describing a modern day Berkshire Hathaway in a sense that I mean, I'm only saying that really half tongue in cheek. I mean, when you put it that way, I mean, Berkshire obviously being very insurance centric but not afraid obviously to invest across a number of different markets and PayPal obviously being very payments centric, but also investing beyond just that space as you mentioned. That's exciting to me because we've seen the potential of this business and even though it may be in a little bit of a trough right now. I don't know that I would necessarily caution investors against the stock. We'll come to the conclusions there, but let's dig through this quarter here to really get a better idea of why the market right now is viewing PayPal more with that glass half empty lens. Because I'll tell you as someone who's followed this business for a while, Matt, I feel like PayPal 100 percent deserve the butt-kicking it got after that earnings report. For some I've been a big fan of this business for a long time, I still own shares myself. I was really disappointed in what management brought to the table there. Talk a little bit about that and what we learned from this most recent report.

Matt Frankel: Sure. This is going to sound really negative like you just said, but we'll get to the good afterwards.

Jason Moser: Yeah.

Matt Frankel: PayPal missed earnings, that's the headline. They missed analyst expectations for fourth-quarter earnings. But as an experienced investor, Jason, you know better than anybody that the easiest way to tank a stock after an earnings report is to offer weak guidance. That's the easiest demo, sure-fire way your stock is going to go down, and that's exactly what happened here. PayPal issued full year 2022 earnings guidance below expectations. They blamed inflation headwinds and things like that which to be fair is going on, but it's really the user growth that has people worried. Their user base grew by 49 million in 2021 and they are expecting between 15 million and 20 million in 2022. That's a big slowdown in growth. They reported 4.5 million illegitimate accounts that they had to cut it back out of the numbers, and they announced that they are shifting their focus away from growing the user base to engaging the users that they already have whether that's a good or bad thing. Remember that PayPal was guiding for 750 million users within a few years. They are at about 426 million today, so that's a big disappointment to the PayPal bulls.

Jason Moser: Yeah, it really is. I'm glad you brought the users situation up there because I think a lot of folks probably were focused immediately on that guidance and on paper. It doesn't look like it's that big of a guide down. There was an expectation for around 17.9 percent, 18 percent top-line growth for 2022. They ratcheted that back down to a range of 15 percent-17 percent, and earnings growth consequently is going to be next to nothing essentially. At least that's what the guidance is, now we know. They have a good history of exceeding results so we'll have to see what the 2022 ultimately brings. It really to me all boil back down to that user situation, and that is a big deal. 

They noted this in the call that they've got this massive user base, but really it's only about 1/3 of that user base that's responsible for the majority of the company's revenue, so it really does need to focus on a specific segment of that massive user base. In other words quality matters, and I think that's what we finally come to realize with a business like PayPal. It's not exempt from that. Quality users matter in whatever business, and PayPal certainly is feeling that now. I feel like that's a timing thing maybe more than anything. I don't mind if they're growing users more slowly as long as they're getting users that are coming in and using the services, the nature of what they're offering it generates just consistent repeat use. Folks are using those apps every day in some cases. To me I understand the markets pessimism in the guidance that was offered, but I don't feel like this is something that necessarily tells us that PayPal is in trouble or this is a bad business.

Matt Frankel: Note, I feel like PayPal is having a similar moment to where Apple was five years ago when it was transitioning from a growth company to a value company.

Jason Moser: That's a good example.

Matt Frankel: The question is not can they maximize their products which they've already done. Their user growth is slowing down. They see limited growth potential ahead, but can they double down and maximize the value they're getting from the products that they've established so well. Our iPhone has pretty much saturated the market, how can we maximize its revenue stream and how do we make it the best product that it can be? I feel like that's where PayPal is transitioning to right now. If they can do that; double or triple their average revenue per user, I don't really care if they're growing their user base if they can do that so it remains to be seen. How are they're going to do it? But I really like the optionality they have, they have a ton of cash. This is a wildly profitable business, over $5 billion in free cash flow last year. That's a lot of flexibility, so I'm curious to see what they do.

Jason Moser: I think there are a lot of signs in that quarter that showed us the business is doing very well. Total payment volume of $340 billion was up 23 percent from a year ago. Another thing I found fascinating, I'm a little bit on the fence as to really how material buy now, pay later is going to be. It feels like a market that's still taking shape, and so so I'm glad that PayPal has money pure play in the BNPL space. They do have that homegrown side of the business now that pushed through $3.2 billion of total payment volume for the quarter. That buy now, pay later side of their business is running on a $13-billion annualized run rate. That's not bad particularly when you consider other businesses out there like Block that went and acquired their way into that space, Block buying; what was it? After pay, I think, for $30 billion. A couple of different ways to get it done there, but then also the Venmo side of the business that continues to impress. I mean, $60.6 billion in total payment volume and its up 29 percent from a year-ago. The take-rate continuing to improve now that they've got Venmo on that profitability trains so to speak. While the future maybe a little bit up in the year, it really does feel like the signs from that quarter tell us that PayPal is really doing pretty well as a business on its own.

Matt Frankel: You're going to be looking at some of the relationships they have build. Amazon is going to start accepting Venmo for payments that engages with 60 million users or whatever as you just mentioned. Roku just added PayPal checkout to all of it's TV operating systems. These are what are going to engage users. The average PayPal user is making 11 percent more transactions than they were a year ago, and if they can continue that trajectory where their existing user basis using the services is more and more and more they could be on to something here. It could be a long-term value play now.

Jason Moser: On that note, let's walk away from this conversation with an opinion for listeners because I'm sure that's what they really like to hear. Management is calling for earnings per share of $4.67 at the midpoint for this full year. We're seeing PayPal now valued in this 25-ish times forward estimates range which historically seems like a very opportunistic time to buy these shares assuming that the business is firing on all cylinders, they say. How do you feel about this business today, particularly at the current valuation?

Matt Frankel: Well, PayPal peaked at a revenue of $300 billion market cap to about 135 today. They are expecting earnings to grow down 90 percent year over year in 2022, and as you mentioned, a 25-price to earnings multiple. That's a pretty nice combination especially if they can execute on maximizing their user base, so I would be a lot more comfortable pulling the trigger on PayPal today than I would've been like six months ago.

Jason Moser: Given its profitability and strong cash flow, I tend to agree with you there. As a shareholder myself, I think I'm going to hang on tight there and probably bump this one up to the top of the list of positions that I might want to consider adding to here in the coming weeks assuming these valuations hold. I guess we'll just have to check in next quarter to, see how the company is doing, but Matt, it was great catching up with you again. Thanks so much for taking the time to dig into this earnings report and share with us what you've learned about the recent state of affairs here with PayPal.

Matt Frankel: Sure. We always have some great conversations. I always wanted to learn, and hopefully everyone else does to.

Chris Hill: That's all for today but coming up tomorrow a conversation about the new Netflix documentary, Downfall: The Case Against Boeing. As always people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.