Global Champions - PYPL

PayPal is the dominant online payment processing software technology with 50% worldwide market share. The next largest competitors are Stripe with 15% market share and Shopify Pay Installments with 9% market share.1 In other words, PayPal has created the leading online two-sided network connecting merchants and consumers all over the globe. In fact, as of September 30, 2021, PayPal’s platform has scaled to 416 million active accounts, including 33 million active merchant accounts. This ability to see both sides of a transaction more clearly than competitors has enabled PayPal to increase conversion rates for online retailers while simultaneously more quickly and accurately assessing fraud risks. When combined with the unique data and measurement advantages that the internet provides, this two-way view also enables PayPal to innovate more rapidly than many other payments players since it can quickly assess the merchant and consumer impact of new financial products and services that it adds to its platform. As a result, PayPal is one of the leading contenders to develop a super-app that integrates “direct deposit, bill pay, a digital wallet, peer-to-peer payments, shopping tools, crypto capabilities, and more.”2

Whether or not PayPal succeeds in creating a super-app, we think its future is bright. Its virtually unrivaled online merchant and consumer network puts PayPal in prime position to benefit from the dual secular trends of e-commerce, which still accounts for less than 20% of global retail sales, 3 and financial digitization. Moreover, because network value rises exponentially as 1) new participants join a network and 2) each node (i.e. user) of the network gets more productive (in this case, through PayPal’s ever-expanding product and service offerings), we believe PayPal is both difficult to disrupt and likely to maintain or even increase its pricing power over time. Finally, not only does PayPal benefit from network economics but it also benefits from essentially no marginal costs as a result of its digital business model. In other words, the company can process higher per user sales volumes or add new users with little to no human intervention and little need for new physical capital, which means that incremental revenue translates almost entirely into incremental profit. These three factors (e-commerce and financial digitization growth, the economics of networks, and low variable costs) have led to high and increasing returns on capital for PayPal. They also justify, in our view, a higher valuation multiple for PayPal than for most other businesses.

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