With the company's share price down 80% from the peak of the pandemic and its share of online payments continuing to decline, the fintech pioneer and its new chief executive, Alex Chriss, are in desperate need of a victory.
PayPal is one of Silicon Valley's oldest and largest fintech companies and a legendary company, with founders and early employees including Silicon Valley bigwigs such as Elon Musk, Max Levchin, Peter Thiel and Reid Hoffman.
But the past three years have been difficult for PayPal: In July 2021, the company hit a record market capitalization of $360 billion, and since then the stock price has been falling, erasing 80% of its market value, and global e-commerce sales through its PayPal payment button have also fallen without gaining. On top of that, the company's recent attempts to boost its product line have gone unnoticed by analysts.
Alex Chris, CEO of PayPal.
Image source: PayPal
In late January, PayPal held an "Innovation Day" conference, where new CEO Alex Chris promised to "shake the world a little bit." However, a research report from FT Partners captured investors' reactions: the report called the event a "no-innovation day" and said that the so-called "innovative" content "consisted mostly of tedious, repetitive advertising methods, such as ads in PayPal receipts and Venmo's social feeds, and restructuring PayPal's in-app cashback offer."
Wall Street's cynicism may well be a brutal reality test for Chris, 46. He became CEO of PayPal last fall, after 19 years at Intuit, where he served as executive vice president of QuickBooks. For Chris, being asked to help bring PayPal, a San Jose-based 26-year-old company, back to the top, didn't seem easy.
PayPal declined to let Chris be interviewed by Forbes, but former CEO Dan Schulman did so.
Nearly a decade after being spun off from eBay (which acquired PayPal in 2002), PayPal remains profitable, with a net profit of more than $4 billion in 2023 and the largest digital financial network of 220 million monthly active users in the world, second only to Apple Pay and Alipay.
Data from Autonomous Research shows that while PayPal has made dozens of acquisitions and opened up dozens of new business areas, more than 60% of its $14 billion gross profit still comes from PayPal payment buttons. Whether they're buying gadgets on eBay or Etsy or diapers from Target, people click on this icon when they pay. Most users still believe that PayPal is a more secure payment method than handing over trust to some unfamiliar website or person. But the pace of PayPal payment button transaction growth is slowing — last year, it grew only 7 percent in dollar terms, while e-commerce as a whole grew 9 percent.
From the looks of it, this button doesn't seem to have changed much over the years. Craig Maurer, managing director of FT Partners, said: "Its core business is really still cash services on the internet – which is payment software 1.0. "PayPal's problems include its long-standing inability to modernize and integrate payments technology. At the same time, with products such as Apple Pay and Shopify's Shop Pay occupying a larger market share, the competitive advantage that has long supported PayPal's fraud prevention and risk prevention has been greatly weakened.
In 2023, PayPal paid Chris $42 million in compensation, in part depending on the company's future performance, and now he is working to roll out new strategies, including a product called Fastlane designed to speed up customer checkouts. But some analysts are skeptical about the plan's ability to drive earnings, arguing that it may take longer than investors expect it to take effect.
Before Alex Chris took over PayPal, former American Express executive Dan Schulman was at the helm of PayPal for nine years, where he nearly tripled PayPal's annual revenue to $30 billion and rose earnings per stock from less than $1 to $3.85, according to FactSet. Today, however, some Wall Street analysts point out that Schulman is in a predicament of being greedy for more than he can chew.
They noted that some acquisitions do not appear to have paid off, such as PayPal's $2.2 billion acquisition of Sweden's POS checkout device company iZettle in 2018 and Hyperwallet, which provides payment technology for e-commerce platforms, for $400 million in the same year. In 2020, PayPal acquired another platform called Honey for another $4 billion to help website visitors automatically find coupon codes and cashback offers.
Schulman, 66, who owns $40 million worth of PayPal shares, said in an interview with Forbes that some acquisitions have worked "very well," but others have not worked as well as they should. He added that sometimes acquisitions take a long time to create value, noting that PayPal's recently announced new ad tech product is built on top of Honey.
From 2014 to the end of 2023, Dan Schulman served as CEO of PayPal.
图片来源：CHRISTIE HEMM KLOK FOR FORBES
Asked if he had stretched the front too long in the past, Schulman responded: "Every year, we look at what we want to do and try to reduce the amount of tasks, not increase them. But it's not easy to do that. He added: "Alex Chris has been outstanding since he came to the company. A big part of the reason I left was that I had been there for almost a decade. You'll want to have new people come on board, think boldly in different ways, and see if you can build on what you've done. ”
Venmo is another controversial topic in the history of PayPal's acquisition.
In 2013, two years before PayPal spun off from eBay and a year before Schulman took over as PayPal's CEO, eBay spent $800 million to acquire white-label payment processor Braintree and its emerging peer-to-peer payment app Venmo. Venmo completed $270 billion worth of deals in 2023, but it contributed a meagre revenue and profit margin compared to PayPal's main business, according to Autonomous.
To a certain extent, making a profit means trying to get customers to use Venmo's credit card and use the app for external purchases (rather than just transferring money within the Venmo system) as they would a new bank – but the competition in both areas is already fierce. At the same time, PayPal also encountered some difficulties in integrating Venmo with its core platform, and could not produce the effect that one plus one is greater than the sum of its parts.
In June 2023, at his last investor conference, Schulman revealed the difficulties PayPal faces in integrating its fragmented payments infrastructure in response to a question from FT Partners' Craig Maurer.
Schulman said he has been grappling with the issue since he joined PayPal in 2014. But PayPal alone has 4 different payment stacks, while Venmo and Braintree have their own separate payment platforms. "Eight years ago, we set the goal of bringing together all the independent payment platforms to build a modern payment platform," he said. But it's like running a marathon and having a craniotomy at the same time, because it's our payment processing stack that needs to be integrated, and it can't go down for a moment. ”
In Schulman's words, disparate systems make it difficult to scale efficiently, and a large number of engineers have to focus on solving the problem. "It's been a long and difficult process to be honest, but we've done it," he added. He noted that PayPal, Venmo and Braintree now have a unified payment platform, and companies can "start doing a lot of things that we couldn't do with traditional infrastructure, including Venmo and PayPal being interoperable." ”
Essentially, it took PayPal eight years to merge its two systems, and in the meantime, it couldn't do it on its own technology alone — they still needed a Visa+ product to help with the process. "It's amazing to admit it," Maurer said. Schulman countered in an interview: "It's a very complex, detailed migration that requires building and stress testing every part of the architecture...... Without all this hard work that must be done perfectly, PayPal would not have been able to innovate on top of a modern technology stack. ”
After 2021, PayPal stopped reporting Venmo's revenue, when the latter earned about $900 million, which may also indicate that its growth is slowing. In addition to Venmo, integration challenges may also help explain why PayPal struggles to get the most out of more acquisitions.
At the same time, PayPal has built a fast-growing business by helping businesses accept online payments through Braintree technology, competing with fintech companies including Stripe and Adyen.
PayPal's non-branded payment processing division, much of which is powered by Braintree, completed $534 billion in transactions in 2023 (compared to Stripe's $1 trillion), up from $299 billion in 2021.
So what's the problem?
Part of the reason PayPal is in such a difficult situation is because it has adopted a risky strategy – price wars.
Analysts point out that PayPal only charges 0.2% of each transaction as a service fee for non-branded payment transactions (i.e., the payment process does not highlight the PayPal logo, but is processed in the background and the checkout process remains within the merchant's website), while in branded transactions (i.e., the transaction process highlights PayPal's logo and branding), the proportion is as high as 1.5% to 2%. Darrin Peller, managing director of Wolfe Research, said that under Alex Chris's leadership, PayPal has become less aggressive in pricing, and investors are now mainly focused on profitability, which is not Braintree's strong suit.
Ken Suchoski, an analyst at Autonomous Research, believes that Schulman's tenure has been devoid of innovation in branded trading buttons. Not surprisingly, Schulman disagrees with this statement at all. He said that during his tenure as CEO, PayPal has achieved excellent results in terms of payment speed, transaction clicks, number of features offered, and fraud prevention. He also noted that when he took over PayPal, its technology system was "old", and it was he who oversaw PayPal's code reform, which grew from 200 software updates per year to tens of thousands of software updates per year.
Suchowski said PayPal's share of the $6 trillion global e-commerce market fell from a peak of 8% in 2021 to 7% in 2023. Apple Pay, the iPhone's own payment method, has soared from 0.5 percent to 3 percent in just five years, and may have become the fastest and easiest payment method used by Americans today. Suchowski also said that Shop Pay, a payment app from Canadian e-commerce software Shopify, fits well into the former's e-commerce ecosystem, with a market share of 1% during the same period.
In earnings calls and interviews, Alex Chris has been referring to 2024 as a "transition year." "We have a plan to get the company back on track," he said in April. Wall Street analysts describe him as more focused than Schulman.
One of the cores of Chris's plan is Fastlane.
It's a new product developed under Schulman's leadership to make checkout for non-members faster, i.e., on websites where buyers aren't registered. The product allows customers who don't use the PayPal button to save their shipping and credit card information so that when they shop again, they only need to enter their email and the verification code sent to their phone to pay.
Chris said that 60 percent of e-commerce transactions are paid by non-members, but nearly 50 percent of those transactions are canceled. But PayPal found that in the early cases of using Fastlane, 80% of customers who used non-member checkouts would continue to shop.
These statistics sound promising, especially considering that the total potential market for non-member checkouts is in the trillions of dollars. But because the product is an unbranded service of PayPal, it's still unknown how much Chris can charge merchants and how much real profit it can bring. "We're going to be very aggressive in terms of pricing when we move forward with Fastlane in 2024 because we want to promote the product," Chris said in April. Afterward, he gave an ambiguous promise of the product's profitability: "Rest assured, we'll price it based on value to make sure we get a fair return." ”
Analysts expect PayPal to initially charge large customers about the same price as Braintree, or about 0.2% of the transaction value. Subsequently, it also needs to sign up with small businesses in order to charge a higher fee for each transaction. With this feature not yet widely available and the industry structure shifting to larger merchants, analysts at both Autonomous and FT Partners agree that it will take years for Fastlane to bring about meaningful change. "I think the idea might be too radical if they expect Fastlane to have a substantial impact on the 2024 holiday season," Maurer said...... It will not be until the second half of 2025 that we will have a thorough understanding of whether Fastlane has the energy or not. ”
Others are more optimistic, such as Mizuho, Japan's Mizuho Financial Group, which recently downgraded PayPal's stock rating from "neutral" to "buy," and senior analyst Dan Dolev estimates that PayPal will eventually charge 0.7% of each transaction from Fastlane, and that PayPal will be on top of $14 billion in annual net profit over the next 18 months or so. Earn another $1 billion to $1.5 billion.
Dolef also said he was pleased that PayPal button's market share loss had flattened based on Mizuho's research on top retailers' online transaction volumes. "You certainly don't want it to be a piece of ice in the oven that melts gradually, but the evidence so far suggests it's more like a piece of ice that melts gradually in the fridge," he said. The latter situation is relatively acceptable. In a recent research report, he also commented on this apparent level of stability: "This could mean that PayPal has survived the worst stage of losing market share to Apple Pay and other companies, which we can see in the stock price." ”
More optimistic analysts, including Dolloff, estimate that PayPal's gross profit will grow by 6% to 7% in 2025 and 2026. Ken Suchowski and others take a different view, arguing that PayPal's gross profit growth will only be slower over the next two years, around 3 to 4 percent. According to Bloomberg, Ken Suchowski was the only analyst who gave the stock an "underperforming" rating among the 45 analysts who studied PayPal. (Among them, 20 analysts gave PayPal a more neutral rating, such as "neutral," "hold," and "depending on market performance.") It's encouraging to have only one analyst taking a negative view of it, but PayPal's stock moves are laughable — PayPal has fallen about twice as much as the average listed fintech stock over the past 12 months.
Sujosky argues that people who buy shares in payment software companies can get better returns by buying shares in companies such as Fiserv and FIS. He said the two companies are trading at similar valuation multiples as PayPal but are not facing the same competitive pressures and are growing their revenues at up to 8 percent a year. "Basically, you can buy another business for the same price, but their revenue is still growing, and you don't have to face the same situation as you did with PayPal."
Since earlier this year, Alex Chris seems to have become more conservative — he no longer goes around preaching that PayPal will surprise people. Darin Peller of Wolf Research said: "He wanted to set the bar low at the beginning and then slowly but surely raise the bar. This is a better way to boost their share price. ”
This article is translated from:
https://www.forbes.com/sites/jeffkauflin/2024/06/21/why-paypals-comeback-plan-could-take-years-if-it-works-at-all/
文:Jeff Kauflin
翻译:Bella&Sunny
Proofreading: Vivian
Forbes China exclusive manuscript, please do not reprint without permission
Header image source: Getty Images
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