It's tempting to think of PayPal Holdings (PYPL -1.67%) as something of an upstart. After all, it was spun off from parent company eBay (EBAY -0.82%) only seven years ago in 2015. But PayPal is already a giant. Its market cap of $129 billion makes it the 64th largest American public corporation -- sandwiched between industrial-sector mainstays Honeywell and Deere.
There's no doubt that it has come a long way in a short time. But will PayPal be able to maintain its place? Let's examine the bull and the bear case for the company.
Image source: Getty Images.
The bull case: Solid cash flow supports substantial share buybacks.
Since its spin-off from eBay, PayPal has been a growth stock. In 2021, the company reported revenue of $25.4 billion, up from $21.5 billion in 2020 for a year-over-year increase of 18%. What's more, PayPal generated $5.4 billion of free cash flow (FCF) in 2021, allowing it to repurchase $3.4 billion of stock last year alone.
PYPL free cash flow. Data by YCharts.
The company is already sitting on $18 billion in cash, and Wall Street analysts expect PayPal to grow FCF to between $7 billion and $8 billion in 2022. Flush with cash, it can expand its share repurchases and increase its stock price.
The bear case: Slowing growth and shrinking market share begin to bite.
PayPal is still growing revenue, but the growth rate is shrinking. Last year's 18% rate is down from 21% in 2020. Moreover, one of PayPal's most important products is losing steam.
| Total Payment Volume (TPV) of Venmo from 1st quarter 2021 through 4th quarter 2021 in billion U.S. dollars | ||||
|---|---|---|---|---|
| Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | |
| Venmo TPV | 51 | 58 | 60 | 60.6 |
The above table shows the total payment volume (TPV) at Venmo, PayPal's signature peer-to-peer payment app. As you can see, after surging in the first half of 2021, momentum stalled in the second half of last year.
Moreover, a recent survey of teens by Piper Sandler revealed some trouble for PayPal. It showed that they ranked Apple's (AAPL -2.19%) Apple Pay ahead of Venmo as their preferred digital payment method. Furthermore, teens ranked Block's Cash App in third place, with PayPal fourth.
There's no need to buy PayPal today
PayPal still has many strengths it can rely on. It has over 426 million active accounts, including 34 million vendor accounts. It is by far the most accepted digital wallet, with more than 76% acceptance among the top 1,500 retailers in North America and Europe (Apple Pay is second with 27%).
But its slowing growth rate is a concern. For existing holders, I see no reason to add more PayPal right now. For those without a position, I would sit tight until PayPal can demonstrate that it can boost its growth rate.
