PayPal: Bullish with a Twist?

Berkshire Sells 13% of Apple Stake

Author

Alan Soclof
May 05, 2024

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Good Morning!

I hope everyone is having a great spring and is enjoying the warmer weather! When I think of spring, I always think NBA Playoffs and my Cleveland Cavaliers just so happen to have a massive Game 7 in a couple of hours against the Orlando Magic.

In order to help deal with the stress of the series, I have spent some time working on a new edition of The Crossover, and I am excited to share it with all of you!

In today’s edition, I will share just a couple of thoughts on PayPal’s earnings, some key articles and tweets on the markets, and take a look at one of Buffett’s big recent stock moves that we learned of over the weekend.

Speaking of Buffett, check out this incredible couple minute video of Buffett answering a question he received yesterday at Berkshire’s Annual Meeting on how he would spend one more day with his recently passed long time business partner and friend Charlie Munger.

Showtime!

Three quick housekeeping announcements/reminders before we get started:

  1. All opinions in The Crossover are 100% my own.

  2. No Artificial Intelligence/ChatGPT is used in writing The Crossover. (Who needs AI when you have AL!)

  3. The Crossover is not investment advice and is for education and entertainment purposes solely.

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MAIN STORY

PayPal: Bullish with a Twist

Credit: Smith Collection/Gado/Getty Images

The News: PayPal released their Q1 ‘24 earnings last week. Here were some of the key stats:

  • Revenue: $7.7B representing a 9% increase YoY

  • Non-GAAP EPS: $1.08 representing a 27% increase YoY

  • Transaction Margin Dollars: 4% Increase

  • FCF: $1.8B

  • Buybacks: $1.5B (25M Shares)

As part of the earnings release, PayPal management also increased their guidance for Fiscal Year 2024. Additionally, along with the results, CEO Alex Chriss shared this commentary:

“We delivered a solid set of results in Q1 and I’m encouraged by the progress the team is making against PayPal’s go-forward strategy and in strengthening our foundation.

2024 remains a transition year and we are focused on execution – driving our key strategic initiatives, realizing cost savings, and reinvesting appropriately to position the company for consistent, high-quality profitable growth in the future.”

Alan’s Angle:

I absolutely love what is happening at PayPal.

First of all, reading through the transcript of the call, I just think that Chriss is running the business with tenacity, logic, and a clear focus on profitable growth. While this sounds straightforward and simple, this is not always how big public companies are run. PayPal feels and sounds like a company I want to invest in.

Specifically, the new PayPal team is already making meaningful changes to several core areas of the business including:

  • Improving onboarding of new customers to drive them towards PayPal debit cards as debit card users generate 2x more transaction activity than people who primarily use just PayPal checkout.

  • Continued development and implementation of Fastlane which is now used by early partners where they are seeing 80% conversion rate for returning users through their guest checkout flow.

  • Continued focus on SMBs where PayPal is “here to serve and win the small business market.”

What also continues to excite me about the Company is the way they are thinking and talking about Venmo. Here were some of the interesting golden nuggets shared on Venmo in the earnings call:

  • There was a 21% YoY increase in consumers using the Venmo debit card.

  • Venmo debit cardholders earn PayPal 6x the revenue that a P2P customer does.

  • Venmo has 60M monthly users and 90M annual users

I specifically love to see the transparency around the amount of Venmo users on the platform as I don’t think they have shared this type of information in quite a while.

Additionally, my personal highlight from the call was this spicy statement by Alex on Venmo

“Just to give you -- put some numbers behind it, there's $18 billion of net new funds that flow into the platform of Venmo every single month. 80% of those dollars leave within 10 days. That is just unacceptable.”

PayPal is focused on keeping dollars that enter the Venmo ecosystem in the Venmo ecosystem.

Now, after sharing why I am excited about the continued developments at the company, I want to share two things that make me a little nervous.

The first one is that I could see the market getting too excited about this name. PayPal generates serious FCF (~$5B annually), is buying back a lot of stock ($5B+ in ‘24), and has a bullet proof balance sheet with $17B in cash & $11B in debt. I would argue that we saw the market getting too excited already with the stock running up to ~$70 post earnings.

I love my cost basis in the high $50’s, however, the risk profile at those levels versus around $70 is very different — over $10B in equity value different. Not getting too high or too low with the volatility I expect in this name is going to be important and something I wanted to recognize.

The second point (which also builds off of the first one) is that PayPal management has continued to caution that this is a “Year of Transition” and that there could be some difficult moments, specifically in a dynamic, uncertain macro environment. The Company continues to have serious competition from Google Pay, Apple Pay, etc. who have not just disappeared overnight.

After all, there is a reason this stock was driven down mightily over the past several years and why Chriss was brought in to run the Company in the first place.

Long story short, while there are concerns and dynamics to keep an eye on, I continue to be excited about PayPal due to the strong profitability, emphasis on returning capital to shareholders, and execution by Alex Chriss & team.

-Alan

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BERKSHIRE UPDATE

Berkshire Sells 13% of Apple Stake

On Saturday Morning, Berkshire Hathaway disclosed that they sold 115M shares (13%) of their Apple stake in Q1 ‘24 which was and continues to be their biggest holding. Just a couple hours later, Buffett was on stage at Berkshire’s Annual Meeting in Omaha and shared interesting insight on this decision.

Here are three quotes from his 9 minute answer on the Apple decision that contained great general investment wisdom as well.

  1. “At the end of the year, I think it would be extremely likely that Apple is the largest common stock holding we have.”

  2. “It is such a simple approach that it is almost deceptive. Most things if you keep working harder and harder at, you learn a little more math or a little more physics, but investing you don’t have to do that, you just have to have your mindset probably… We will have Apple as our largest investment but I do not mind at all under current conditions building the cash position.”

  3. “We always hope at Berkshire to pay substantial Federal Income Taxes. We think it is appropriate that a country that has been as generous to our owners…Berkshire is lucky it was here… If we send in a check like we did last year, we sent in over $5B to the US Federal Government, if 800 other companies did the same thing, no other person in the US would have had to pay a dime of Federal Taxes…”

Make sure to check out the full answer from the Oracle of Omaha himself here.

GOLDEN NUGGETS

Squishmallows, Meta, Cheesecake Factory

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MEME OF THE MONTH

How Much Does Quohag’s Finest Cost For You?

Answer on my end? Probably $2.25M. Maybe more.

Thanks for the read! Let me know what you thought by replying back to this email.

— Alan

Disclaimer: The Crossover is not a professional financial service. All materials released from The Crossover are for educational and entertainment purposes. The Crossover is not a replacement for a professional's opinion. Contributors to the Crossover might have positions in the equities in the The Crossover Portfolio or mentioned in the newsletter.;