PayPal (PYPL 2.90%) is unique in the fintech and payments space in that it has products and services that cater to different customer groups, including individuals, small businesses, and larger enterprises. A history of success and a trusted brand certainly help attract new business.
Investors are likely familiar with Venmo, the personal financial tool that helps facilitate easy peer-to-peer transactions. This single service handled $68 billion of total payment volume (TPV) in the last three months, a massive sum.
But while Venmo is important for PayPal, another segment has been driving some serious growth for the business. Here's what investors should know.
Focusing on merchants
What's interesting is that in 2013, PayPal acquired Braintree for $800 million. This purchase also included Venmo. However, Braintree has been driving significant growth for the company recently.
Braintree allows companies of all sizes to accept payments in their mobile apps and on their websites. Whereas Venmo primarily targets individuals, Braintree is focused on merchants and their payment needs. Major clients include Adobe, Booking Holdings, and DoorDash.
Growth has been stellar. In 2022, Braintree accounted for about 30% of PayPal's entire TPV volume. This roughly $400 billion was up 40% from the prior year, a better gain than any other segment.
And Braintree's importance hasn't declined this year. PayPal's management said that the 15% growth in TPV in Q3 was "primarily driven by Braintree." Additionally, the segment processed a whopping $450 billion in TPV in the last 12 months, which the leadership team estimates is about 10% of the global market for large enterprise e-commerce spending.
There's no doubt that Braintree is critical to PayPal's success. It's a division that most people likely aren't familiar with because it operates an unbranded checkout solution, as opposed to the flagship PayPal branded checkout option.
But it makes sense that Braintree would be a focal point. The segment bolsters PayPal's competitive standing in the industry. Since PayPal collects data from its hundreds of millions of consumer accounts, like purchasing habits and behaviors, it can better minimize fraud and boost authorization rates for its merchant customers. It's easy to see how Braintree has an advantage compared to its rivals.
While Braintree is driving greater volume growth for the business, because these transactions carry higher expenses, they can hurt PayPal's profitability. We can see that the company's transaction margin has steadily declined in each of the last four quarters on a sequential basis. Investors will want to watch these margin trends going forward to ensure PayPal isn't sacrificing profitability in the name of growth.
Is it time to buy PayPal stock?
Investors who are interested in buying shares of PayPal might not find a better time to do so than right now. The stock currently trades 80% below its record price from July 2021. And the forward price-to-earnings ratio is under 13 at the moment.
You'd think that the business was really struggling based on that beaten-down valuation. But PayPal registered 8% revenue growth and an 11% rise in transactions in the most recent quarter. And it generated $1.1 billion of free cash flow. These are all healthy figures, especially when considering the macroeconomic uncertainty.
Alex Chriss, the new CEO, is fully focused on driving greater efficiencies and financial discipline across the company, something shareholders should want to see. On the flip side, this shouldn't impact PayPal's ability to continue benefiting from the ongoing growth of digital payments and e-commerce spending.
All signs point to this being a winning stock over the next several years.
