When it comes to PayPal (NASDAQ: PYPL), I hear things. “None of my friends use PayPal anymore” and “I hardly ever see PayPal at checkout” are common gripes that reach my ears. But these arguments against this stock are based on anecdotal evidence. And anecdotal evidence is particularly dangerous for investors when they’re unaware of what’s happening behind the scenes.
Indeed, PayPal is scoring wins behind the scenes and betting the future of the company on what’s happening. And its recently expanded partnership with Uber Technologies (NYSE: UBER) allows us a rare peek behind the curtain to see what’s going on.
The partnership between PayPal and Uber
On Sept. 12, PayPal and Uber officially expanded their long-running history of cooperation. Consider that Uber’s ride-hailing app has been integrated with PayPal since 2012. Moreover, when Uber had its initial public offering in 2019, PayPal made a strategic investment of $500 million.
However, Uber users might not even be aware that PayPal powers the platform. In fact, PayPal quietly processes payments for many platforms, including Airbnb, Spotify, and DoorDash.
Braintree is an enterprise payments platform that PayPal sells to enterprise customers. PayPal could offer checkout services with the PayPal logo on it. But many prefer to have unbranded checkout with Braintree in the background. And this is mostly how Uber and PayPal have worked together until now.
Like any platform, PayPal’s Braintree has multiple products to choose from. And the new expanded partnership with Uber integrates more previously unused features. This includes better chargeback protections and reward-program integrations.
With market capitalizations of $98 billion, $94 billion, and $33 billion, respectively, there are only so many businesses the size of PayPal’s existing Braintree customers of Uber, Airbnb, and DoorDash. Winning new customers this size is great when it happens, but realistically, it won’t be a frequent occurrence.
Therefore, it’s crucial for PayPal to win incremental business from these customers after it gets its foot in the door. And this is exactly the takeaway from its expanded partnership with Uber: The company is doing a good enough job to win new business. And this gives me optimism that it has room to grow as existing customers adopt more products from PayPal’s Braintree.
The future of PayPal
Over the last year, Uber reported gross bookings (the total dollar value of transactions) of over $120 billion. Simply winning the right to handle a small, incremental percentage of this business is big for PayPal.
Beyond the deal with Uber, PayPal is scoring other wins in the enterprise space — wins that investors often don’t see or appreciate. And the company is doubling down on this part of the business going forward.
On Aug. 14, PayPal announced its new CEO would be Alex Chriss, an executive with experience working with small businesses. Granted, Uber and Airbnb aren’t small businesses. But Chriss’ experience with business customers suggests that PayPal is more interested in focusing on its enterprise business and not so much on its consumer-facing products.
In the first half of 2023, total payment volume for PayPal only increased about 10% from the comparable period of 2022. By comparison, payment volume for its enterprise-facing Braintree platform is up 30%. This is clearly where the company is excelling right now.
With net revenue only up 7% year over year in the second quarter of 2023, growth has slowed dramatically for PayPal. But growth is better for its enterprise products. Therefore, it’s feasible that the company’s overall growth could pick back up as it emphasizes the parts of its business that already have momentum.
Trading at a price-to-sales ratio of just 2.5, PayPal stock has never been cheaper than it is right now. So the valuation risk for this company is low. By contrast, the potential reward is looking strong, now with a new CEO to lead growth in its enterprise-facing business. For these reasons, now may be a good time to buy PayPal stock, looking ahead for the next several years.
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Jon Quast has positions in Airbnb and PayPal. The Motley Fool has positions in and recommends Airbnb, DoorDash, PayPal, Spotify Technology, and Uber Technologies. The Motley Fool recommends the following options: short December 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.