When eBay spun off PayPal (PYPL 0.49%) in an IPO in 2015, the online payments company was worth about $45 billion. Today, PayPal has a market cap of just over $300 billion.
PayPal's annual revenue grew from $9.24 billion in 2015 to $21.45 billion in 2020, as its number of active accounts rose from 179 million to 377 million. It ended the second quarter of 2021 with 403 million active accounts, and it expects its revenue to rise about 20% to $25.75 billion for the full year.
PayPal clearly flourished after the spinoff, even as it lost eBay to its Dutch rival Adyen and faced aggressive fintech challengers like Square. But will PayPal's growth streak continue, pushing its valuation toward the trillion-dollar mark by 2025?
Image source: PayPal.
PayPal's growth targets for 2025
PayPal set some ambitious targets at its latest investor day this February. By 2025, it expects to nearly double its active accounts to 750 million, and more than double its annual revenue to over $50 billion. It expects its earnings to rise at a compound annual growth rate (CAGR) of 22% between 2020 and 2025, and for its annual free cash flow to double from $5 billion to over $10 billion.
PayPal expects the growing acceptance of NFC and QR code payments, along with the expansion of its platform with additional financial services, to drive that growth.
Its new "super app" -- which bundles together mobile messages, a digital wallet, peer-to-peer payments, bill payments, direct deposits, cryptocurrency services, shopping tools, buy now, pay later features, and more -- sets up the foundations for that expansion. It also recently partnered with Synchrony Financial to add a high-yield savings account, PayPal Savings, to that ecosystem.
Those moves will all make it easier to launch additional features, including free stock trades and other investment services, which would help it keep pace with Square's Cash App and Robinhood.
Can PayPal really double its revenue by 2025?
The global digital payments market could grow at a CAGR of 14.2% between 2020 and 2025, according to Markets and Markets.
PayPal's annual revenue would need to grow at a CAGR of 18.4% between 2020 and 2025 to hit $50 billion, so it likely expects to grow its revenue at a slightly faster pace than the broader market.
That's a pretty optimistic projection, since PayPal's annual revenue already grew at a CAGR of 18.5% between 2015 and 2020. It's only expecting a slight deceleration from those previous five years, even as it faces much tougher competition from Square, Adyen, and other growing fintech rivals.
I believe it will be challenging, but certainly not impossible, for PayPal to generate $50 billion in annual revenue by 2025. Until then, investors should keep tabs on PayPal's ability to expand its fintech ecosystem, as well as its competitors' shifting strategies, to see if it can fulfill those promises.
Could PayPal's stock more than triple by 2025?
For PayPal to join the trillion-dollar club by 2025, its stock would need to more than triple within the next four years. That could be a high bar to clear: PayPal's stock has already risen more than 600% since its spinoff from eBay, and it currently trades at 45 times forward earnings and 12 times this year's sales.
If PayPal maintains those valuations and hits its long-term EPS growth targets, its stock could be trading in the low $470s by the beginning of 2025. Assuming its share count stays roughly the same, the company would be worth about $560 billion.
PayPal constantly repurchases its own shares, but most of those buybacks are used to offset its dilution from stock-based compensation. Since its spinoff, PayPal only reduced its share count by less than 3% -- so additional buybacks probably won't tighten up its valuations by 2025.
Therefore, the only way PayPal's market cap might hit $1 trillion by 2025 is if investors are willing to pay a much higher multiple of about 80 times forward earnings. The likelihood of that happening is fairly low, even if PayPal's adjusted earnings grow at a CAGR of 22% between 2020 to 2025.
Look beyond the market caps
PayPal's stock probably won't triple over the next four years and turn it into a trillion-dollar company. However, it should continue generating robust growth as people use less cash and rely more on mobile payment apps for both digital payments and investments. Therefore, PayPal is still a solid long-term investment in the booming fintech market, and it should remain an attractive option for investors who think companies like Adyen, Square, and Robinhood are too hot to handle.
