Since going public in 2015, financial technology (fintech) company PayPal Holdings (PYPL +1.28%) has generated tens of billions of dollars in profits. Where'd it all go?
It's not only important to know how a company makes money -- it's also important to know how that money is spent. In this article, I'll take a big picture view of PayPal's profits and capital allocation before explaining why I believe shareholders can hope for better returns moving forward.
NASDAQ: PYPL
Key Data Points
The multibillion-dollar question
Since going public, PayPal has spent over $19 billion repurchasing its own shares.
Share repurchases can be good for shareholders. As an example, let's say there are 100 shares of a company, and the company buys back 10 shares. The remaining 90 shares each represent a larger stake in the business and can thus be more valuable.
Here's the year-by-year breakdown of PayPal's share repurchase activity.
| Year | Shares repurchased | Money spent |
|---|---|---|
| 2015 | 0 | $0 |
| 2016 | 27.3 million | $995 million |
| 2017 | 19.7 million | $1,006 million |
| 2018 | 43.7 million | $3,525 million |
| 2019 | 14.0 million | $1,400 million |
| 2020 | 12.0 million | $1,600 million |
| 2021 | 15.0 million | $3,400 million |
| 2022 | 41.0 million | $4,200 million |
| 2023 YTD | 41.0 million | $3,000 million |
| Total | 213.7 million | $19,126 million |
Source: PayPal's financial filings. Chart by author.
Moreover, PayPal plans to spend about $2 billion repurchasing shares in the remainder of 2023, in addition to the $3 billion it's already spent this year. At $5 billion total, that would make this year PayPal's biggest year ever for share repurchases.
To be sure, $19.1 billion is a lot of money. But is it a lot for a company of PayPal's caliber? To answer this, let's look at the company's free cash flow.
From 2015 through the second quarter of 2023, PayPal has generated almost $30.9 billion in cumulative free cash flow. Therefore, $19.1 billion on share repurchases is a massive outlay for the company. Management has spent almost two-thirds of this cash flow just buying back stock.
Of course, share repurchases aren't PayPal's only priority for capital allocation. The company also acquires other businesses. Here's what that's looked like since going public in 2015.
| Year | Number of acquisitions | Money spent |
|---|---|---|
| 2015 | 4 | $1,400 million |
| 2016 | 0 | $0 |
| 2017 | 2 | $421 million |
| 2018 | 4 | $2,700 million |
| 2019 | 0 | $0 |
| 2020 | 1 | $4,000 million |
| 2021 | 5 | $3,100 million |
| 2022 | 0 | $0 |
| 2023 YTD | 0 | $0 |
| Total | 16 | $11,621 million |
Source: PayPal's financial filings. Chart by author.
Putting it all together, PayPal has spent approximately $30.7 billion on share repurchases and acquisitions from 2015 until now. And during this time, the company generated about $30.9 billion in free cash flow. Therefore, virtually all its free cash flow is accounted for in just these two categories.
What does this mean for PayPal stock?
To be clear, spending money on share repurchases and acquisitions is entirely valid. But ideally, companies should create more than $1 of long-term shareholder value for every $1 they spend. With this in mind, I believe it's fair to be critical of PayPal's capital allocation as a public company.
For example, PayPal's most expensive acquisition was Honey -- a browser extension for applying coupon codes at checkout. Just under $3 billion of the nearly $4 billion price tag was goodwill, suggesting PayPal overpaid. It's hard for investors to justify the acquisition, considering management doesn't even mention Honey anymore on conference calls.
Moreover, even though it's spent $19 billion repurchasing shares, PayPal's outstanding share count is barely down over the last eight years, as the chart below shows.
Data by YCharts.
For much of its time as a public company, PayPal's share repurchases mostly just offset stock-based compensation -- shares given to employees as part of their compensation package. And stock-based compensation is often exacerbated with acquisitions.
Therefore, PayPal's past capital allocation decisions haven't been as effective as shareholders would have hoped.
But there's a more positive closing takeaway: PayPal's more recent decisions are having a bigger effect than those of the past. It's been nearly two years since the company made an acquisition, and share repurchases since the start of 2022 are reducing the share count faster than they did previously.
At the end of the day, PayPal is a massive business with 431 million active accounts. And it expects to generate a substantial $5 billion in free cash flow in 2023. If this cash flow is used to reduce its share count at an accelerated rate, this can create more shareholder value than it did previously.
PayPal may not have used its $30.9 billion in free cash flow to its fullest potential since going public. But the company's capital allocation strategy appears to be improving, which is partly why PayPal could be a turnaround stock to buy now.
