Payments Technology, United States Sector: Information Technology NASDAQ: PYPL Industry Group: Software & Services Valuation as of September 30, 2019 Industry: IT Services

Investment Recommendation: Buy

Investment Thesis: 1. Global ecommerce growth trends and growth in mobile transactions. 2. Paypal’s competitive advantage as a leading digital wallet with a two-sided platform that operates across all operating systems and allows merchants

to connect to consumers worldwide. 3. Unique wallet authentication process and fraud prevention capabilities resulting in higher transaction margins for ecommerce payments. 4. Dominate share of mobile digital wallet customers presents high growth partnership development opportunities.

Investment Risks

1. Slower international expansion. In particular, in the APAC region where mobile and ecommerce payments are growing at the highest rates and competitive pressures are high.

2. Emergence of new technology disrupters and PayPal’s inability to innovate or adapt to possible changes in payment networks (Blockchain) and crypto currencies (Libra, Bitcoin, Ripple, Ect.)

Q3 2019 Update: Growth in Core Merchant TPV drives PayPal forward… Paypal is recommended a buy as it continues to show strength in Core merchant TPV growth replacing the decline of eBay marketplace volumes. The Core merchant growth rate continues to accelerate in Q3-19 on a Y/Y basis at 24% making up 64% of TPV while EBAY volumes at decline at a steady low single digit pace of 4% Y/Y. The risks associated with the expiration of the EBAY operating agreement appear muted: eBay Payment Intermediation: As eBay becomes its own payment facilitator and begins to managed the payment process for its merchants, it is unclear on

the exact integration eBay and Paypal will have going forward and how much of the payment value chain will be shifted away from PayPal. However, both eBay and PayPal have indicated the following: o PayPal will remain a payment option for consumers on the marketplace checkout and will compete with Apple and Google for digital wallet

transactions. o In January 2018, eBay disclosed that it has signed an agreement with Adyen to be its primary partner for payments processing globally, including in

North America. o However, eBay has scaled up to the limit of payment intermediation it can process exiting the third quarter (apprx 9% of GMV) and expects to

maintain these volumes in Q4 and through H1 of 2020. For the full quarter, PayPal maintained approximately 73% of GMV. o PayPal’s share of GMV will remain at ~65% reflecting 9% of eBay intermediation until the expiration of the of the Operating Agreement in July

2020. o eBay intermediation is anticipated to accelerate in H2 2020 after the expiration of the Operating Agreement and then grow at a more gradual pace

through 2021 as additional international countries are onboarded.

There are a number of variables that will impact PayPal’s revenue generated from eBay after H1 2020 including: o PayPal’s share of digital wallet at checkout o Total processor volumes retained o Length of time before the full scale of payment intermediation is realized by eBay o Impact on take rates from the expiration of the operating agreement

GoPay acquisition: allows PayPal entry into the China market which accounts for more than 50% of the growth in ecommerce and presents cross-border

opportunities for domestic merchants looking to sell into China. However, the payments space is highly competitive in China with the likes of Alibaba, Tencent and Baidu. At present, PayPal’s international revenue outside of the UK is ~35% and is growing in line with the US at 18-20% on a spot FX basis. It remains to be seen if PayPal will be able to gain a meaningful share of the ecommerce market in China and the broader APAC region.

Valuation PayPal is currently fairly valued relative to its peers at a 31x forward P/E at Q3 2019. PayPal’s revenue growth, ROIC and Adj FCF per share are higher than its comps. Operating income margins are lower than the average peer group which is skewed by the high margins at Visa and Mastercard. EPS growth and share price volatility are in line with the comps. See exhibits 1 and 6 below for more information. Our base case price target of $126 reflects a 20% total return from the current price level vs. our forecast for Non-GAAP Adjusted EPS Growth of ~15% for the year end 2020 and 21% over a 5 year time horizon using a CAGR. GAAP operating income is expected to grow at a rate of 29% over the next 5 years.

We developed our price targets in view of PayPals current valuation relative to its peers and by using a 2 stage DCF at a 25% short term growth rate with 10 years of linear decline and a perpetuity growth rate of 3%. The initial base case 5-year growth period is modeled assuming (see exhibit 7 for summary income statement of base case model and exhibit 8 for 2 Stage DCF valuation):

PayPal’s share of eBay’s GMV declines to 45% in H2 2020 assuming the majority of US GMV is lost (making up 40% of eBay’s total GMV) and a portion of international GMV is retained.

Followed by a gradual decline to 25% GMV retained by end of 2023 as additional countries are intermediated by eBay. Core Merchant growth rate remains at current levels of 22% (see exhibit: 5) over the next 5 years as PayPal continues to take market share while the

growth rate for global e-commerce moderates. Scenario Analysis (see exhibits 2 - 4):

o Blue Sky: Assumes a higher than expected retention of eBay’s GMV and an accelerated growth rate due to aggressive international expansion o Grey Sky: Assumes a complete loss of eBay GMV and a deceleration in core TPV merchant growth

Adj FCF = Cash from Operations – Change in Settlement Assets & Obligations - CAPEX

Exhibit 2:

Exhibit 3: Blue Sky: Assumes 40% of eBay’s GMV is retained at the end of 2023 and acceleration of the core merchant growth rate to 24% Grey Sky: Assumes none of eBay’s GMV is retained at the end of 2023 and deceleration of the core merchant growth rate drops to 18%

Exhibit 4:

Exhibit 5:

0% 25% 50% 75% 100%

Revenue Growth

ROIC

ROE

Debt / Equity

Adj FCF / Share

Fwd P/E

Volatility

Percentile

Exhibit 1

Avg Comps

PayPal

9% 12% 14%

2% 175 119 94

3% 196 126$ 99

4% 226 139 105 Per

petu

ity

WAAC

Base Case: Target Price Sensitivity

Scenarios: Year: 20-F 21-F 22-F 23-F 20-F 21-F 22-F 23-F 20-F 21-F 22-F 23-F

Revenue Growth - Y/Y 18% 19% 23% 23% 16% 18% 20% 20% 12% 13% 16% 14%Non GAAP Opp Income Growth 18% 22% 33% 33% 14% 18% 28% 27% 7% 6% 15% 12%Non GAAP Opp Income Margin % 24% 24% 26% 29% 23% 23% 24% 26% 22% 21% 21% 21%

12 Month Price Targets:

Price Targets 146$ 126$ 94$

Blue Sky Base Case Grey Sky

Key PayPal Stats

P2P EBAY Core P2P EBAY CoreQ4 - 2018 48.0% -2.1% 20.9% 24.0% 10.4% 65.6%Q1 - 2019 48.0% -6.8% 22.0% 26.0% 9.7% 64.3%Q2 - 2019 37.9% -6.4% 23.5% 27.0% 9.0% 64.0%Q3 - 2019 39.2% -4.4% 24.4% 28.0% 8.4% 63.6%

2018 Total Take Rate 0.0% ~4.0% ~3.4%

Source: Company Data, Internal Research and Analysis

YoY TPV Growth Rates % of Total TPV

Exhibit 6:

Exhibit 7:

Next Shares Stock Price Market Revenue EPS Debt / Forward Forward Adj Historical

Company Earnings Release Outstanding 11/1/2019 Cap Beta Growth Growth ROE Equity ROIC P / S P / E FCF / Share PEG Volatility

PayPal 1/28/2020 1.2 $104.98 $125.98 1.51 15.0% 17.2% 16.0% 0.15x 14.1% 6.3x 31.4x $8.40 1.8 2.0%

Visa 1/28/2020 1.7 $180.93 $307.58 1.25 11.3% 15.6% 40% 0.48x 20.4% 12.5x 30.2x 16.85 1.9 1.5%

Mastercard 1/29/2020 1.0 $279.05 $279.05 1.46 14.2% 18.9% 129% 1.56x 47.3% 15.1x 32.4x 14.07 1.7 1.7%

Square 2/25/2020 0.3 $62.60 $21.45 2.58 33.1% 40.8% -5% 0.78x -2.4% 7.6x 62.6x 1.35 1.5 3.6%

Fiserv (Acquired FDC) 11/6/2019 0.7 $106.85 $73.23 1.49 7.0% 22.5% 6% 0.77x 3.7% 4.8x 22.8x 4.66 1.0 2.5%

Fidelity National Information Services (Acquired WP) 2/10/2019 0.6 $134.15 $82.29 1.01 5.5% 33.3% 14% 0.93x 4.2% 6.2x 20.4x 4.77 0.6 1.5%

Global Payments Network (Acquired with TSS) 2/11/2020 0.3 $172.35 $51.91 1.27 7.1% 38.3% 6% 0.34x 1.7% 5.7x 24.0x 4.10 0.6 1.6%

Mean $135.9 1.51 13.0% 28.2% 31.7% 0.81x 12.48% 8.6x 32.1x $7.6 1.2 2.1%

Median $77.8 1.37 9.2% 27.9% 10.1% 77.7% 4.0% 6.9x 27.1x $4.7 1.3 1.7%

PayPal Comparable Companies

Financial and Valuation MetricsYear: 17-A 18-A 19-F 20-F 21-F 22-F 23-F 5 YR CAGRTotal TPV 456.2 578 714 883 1,091 1,351 1,660 23%

Net Revenue 13.1 15.5 17.8 20.6 24.2 29.1 34.8 18%Operating Income 2.1 2.2 3.0 3.6 4.4 6.0 7.9 29%EBITDA 2.9 3.0 3.9 4.6 5.7 7.4 9.7 27%

GAAP EPS 1.47$ 1.71$ 2.17$ 3.08$ 3.83$ 5.20$ 6.93$ 32%

Non GAAP EPS Adjusted (1) 1.90$ 2.42$ 2.79$ 3.20$ 3.79$ 4.86$ 6.21$ 21%GAAP EPS Growth 16% 27% 42% 25% 36% 33%

Non GAAP EPS Adjusted Growth 28% 15% 15% 18% 28% 28%

Number of Shares: 1,071 Price/Sales 6.30 Net Debt: (9.1) Fwd P/E 31.4xAnnual Dividend: - PEG 1.8xShare Price (10/31/19) 104.98$ Target Price 126$

(1) Excludes below the l ine items: share buybacks, non operating gains/losses from strategic investments, stockbased comp and one time charges. Source: Company Data, Internal Forecast

Summary Income StatementYear: 17-A 18-A 19-F 20-F 21-F 22-F 23-F 5 YR CAGRAcitve Users (EOP) 227 267 307 353 406 467 537 15%

P2P TPV 93.2 138.9 205.6 287.9 388.6 505.2 644.1 36%EBAY TPV 63.9 66.1 60.2 48.1 35.7 32.2 23.7 -19%Core Merchant TPV 299.1 373.4 448.1 546.7 666.9 813.6 992.6 22%

Net Revenue 13.1 15.5 17.8 20.6 24.2 29.1 34.8 18%Total Take Rate 2.9% 2.7% 2.5% 2.3% 2.2% 2.2% 2.1%

Transaction Expenses (5.4) (6.9) (8.5) (10.5) (12.9) (16.0) (19.7) 23%Non Transaction Expense (5.5) (6.4) (6.3) (6.5) (6.8) (7.1) (7.2) 3%

Operating Income 2.1 2.2 3.0 3.6 4.4 6.0 7.9 29%Operating Margin 16% 14% 17% 18% 18% 21% 23%

Non GAAP OPEX Adjustments 0.7 1.2 1.1 1.1 1.1 1.1 1.1

Non GAAP Opearting Income 2.8 3.3 4.1 4.7 5.6 7.1 9.0 22%

Non GAAP Opearting Margin 21% 22% 23% 23% 23% 24% 26%

Cash FlowYear: 17-A 18-A 19-F 20-F 21-F 22-F 23-F 5 YR CAGRCash from Operations 2.5 5.5 4.7 5.2 6.4 8.2 10.5 14%

Less: CAPEX (0.7) (0.8) (0.9) (1.0) (1.2) (1.5) (1.7) + / - HFS Originations / (Collections) 1.3 (1.5) - - - - - Adjusted FCF 3.2 3.2 3.8 4.2 5.2 6.8 8.7 23%Adjusted FCF Per Share 2.59$ 2.62$ 3.59$ 3.98$ 4.97$ 6.53$ 8.52$ 27%

Base Case Growth MetricsYear: 17-A 18-A 19-F 20-F 21-F 22-F 23-F 5 YR CAGR

Revenue Growth 21% 18% 15% 16% 18% 20% 20% 18%GAAP EBIT Growth 34% 3% 38% 19% 23% 35% 32% 29%Non GAAP EBIT Growth 29% 20% 23% 14% 18% 28% 27% 22%GAAP EPS Growth 28% 16% 27% 42% 25% 36% 33% 32%

Non GAAP EPS Adj Growth (1) 27% 28% 15% 15% 18% 28% 28% 21%Non GAAP Operating Margin % 21% 22% 23% 23% 23% 24% 26%(1) Excludes below the l ine items: share buybacks, non operating gains/losses from strategic investments, stockbased comp and one time charges.

Discounted Cash FlowYear: 17-A 18-A 19-F 20-F 21-F 22-F 23-F 5 YR CAGROperating Income (EBIT) 2.1 2.2 3.0 3.6 4.4 6.0 7.9 Add: D&A 0.8 0.8 0.9 1.0 1.2 1.5 1.7 EBITDA 2.9 3.0 3.9 4.6 5.7 7.4 9.7 25.4%Add: Stock Based Comp 0.7 0.9 0.8 0.9 0.9 0.9 0.9 Add: Non Cash Transaction and Loan Losses 1.0 1.3 1.6 1.9 2.4 3.0 3.7 Add: Other Non Cash Items (1.2) (0.1) 0.3 - - - - +/- Changes in Working Capital (0.6) 0.6 (1.4) (1.6) (1.8) (2.1) (2.5)

Cash From Operations 2.9 5.6 5.2 5.9 7.2 9.2 11.7 22.3%

Cash used to originate loans- Prin Loan Originations, Net of Repayment (0.9) 3.1 (0.6) (0.5) (0.7) (0.9) (1.1) + Short term borrowings, Net of Repayment 1.0 1.0 0.4 0.5 0.6 0.8 1.0 - Cost of Borrowing (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)

Net cash used in lending 0.1 4.1 (0.2) (0.0) (0.1) (0.1) (0.1)

- CAPEX (0.7) (0.8) (0.9) (1.0) (1.2) (1.5) (1.7) - Cash Taxes (15%) (0.3) (0.3) (0.5) (0.5) (0.7) (0.9) (1.2)

Total CAPEX and Taxes (1.0) (1.1) (1.3) (1.6) (1.9) (2.4) (2.9)

Free Cash Flow Generated / (Used) 1.9 8.6 3.7 4.3 5.3 6.7 8.6 24.0%Discount Factor 0.89 0.80 0.72 0.64 0.57 NPV 3.3 3.4 3.8 4.3 4.9

Discounted Cash Flow Valuation Single Stage 2 StageSum of PV Yrs 1 - 5 19.7 19.7

Year 5 Ending Cash Flow 8.6 8.6 Capitalization Multiple 23.8x 24.3xTerminal Value 206 209 Discount Factor 0.57 0.57 NPV Terminal Value 117.9 119.9

Total Enterprise Value 137.6 139.7

Add: Cash 9.1 9.1 Add: Non Opperating Assets 2.6 2.6 Less: Debt - - Less: Preferred Stock - - Less: Minority Investment - - Equity Value 149.3 151.3 Shares Outstanding 1.203 1.203 Price Per Share 124.09$ 125.81$

WAAC 11.78%

Capitalization Approach AssumptionsROE 29.1%Retention Ratio 25.0%Long Term Growth Rate (g) = Roe x b 7.3%

H Model AssumptionsShort Term Growth Rate 25.0%# of Years Linear Decline 10.00 Long Term Constant Growth Rate 3.0%

Business Description Paypal has a developed a trusted brand and a network of customers. Originally known for its digital wallet, the company has led developments in merchant processing capabilities and is continuing to expand its service offering to merchants to provide enhanced customer engagement as well as risk management. A number of technologies are emerging to reduce friction and enhance convenience for shoppers including tokenization, one touch payments, QR codes, tap to pay, in-app payments and recurring payments. Paypal is a leader in next generation technology development which gives the company a competitive edge in partnership development with other acquirers, processors, issuers and gateway providers in the payments value chain. In particular, one touch allows users to checkout across all website browsers on mobile and desktop devices reducing online checkout friction and improving marketplace conversion rates. Paypal also provides seamless opt in features to maximize new product adaption on its platform. The payments platform includes PayPal, Braintree, Venmo, Xoom and Paydiant products. The unique two sided platform allows merchants to connect to consumers worldwide. In addition, the company provides value add services that includes PayPal Credit, rewards programs, gateway services and merchant working capital loans. The company reported net revenue of $15.45 billion in 2018 representing a YoY growth rate of 18%. FX and the sale of the US credit portfolio to Synchrony in July 2018 negatively impacted growth by 3.5%. Transaction revenues totaled $13.7 billion and value added services $1.7 billion or 88% and 12% of revenues respectively. Value add services revenue grew at a pace of 12% a year despite the sale of the US consumer credit portfolio. At year end 2018, the company has scaled to 21 million merchant accounts and 267 million active users with total payment volume of $578 billion for the year. With over 22 million merchants, the top 20 merchants make up only 15% of total payment volume excluding legacy EBAY which makes up 11% of total volume in 2018 (Exhibit A). The company derives $6.0 billion or 46% of revenue outside of the united states representing a 19% YoY growth rate in international revenues on a spot FX basis. 50% of active accounts are located outside of the United States. UK totals 11% of revenue. No other country totals more than 10% of total revenue (Exhibit B). Exhibit A

Exhibit B

Industry Overview The global market for electronic payments is large and expected to grow to 52.4 trillion by 2026 representing a 10% CAGR from 2017 to 2026 (Exhibit C). The market is experiencing a shift from cash towards card-based, international and local payment methods. Rapid change is driven by increased globalization of commerce, changing shopper behavior and the raise of mobile. Mobile Commerce (“m-commerce”), a subset of the wider electronic commerce (“e-commerce”) has been estimated by the IDC to be growing at 14% annually between 2011-2016. Higher than the 9% grow rate in e-commerce. According to eMarketer, e-commerce made up 10.2%, or 2.31 trillion of the 22.6 trillion total retail sales worldwide in 2017 and is expected to grow to 4.88 trillion by 2021. Mobile in particular is a channel with significant potential. M-commerce sales reached 1.36 trillion accounting for 59% of total e-commerce spend and is expected to grow to 73% of total e-commerce by 2021 according to eMarketer.

Exhibit C

Exhibit D

Competitive Positioning Paypal has developed strong brand recognition and is a leader in payment technology innovation. In a highly fragmented and highly competitive market on the acquiring and processing side, Paypal has a unique position in the payments industry by offering agnostic consumer and merchant services through its platform facilitating P2P transfers and merchant processing through all major card networks. This allows PayPal to connect merchants directly with consumers in a way that other acquirers and processors are unable to and provides compiling strategic partnership opportunities with participants throughout the value chain. As of the end of 2018, 38 partnership agreements have been signed since 2016. These partnerships not only facilitate international expansion into key markets but also enable the company to grow its user base domestically in strategic areas. Well known and established merchant relationships include UBER, Grab hub, EBAY, Yelp, google, facebook, dropbox, stub hub. In addition to offering PayPal and Venmo, Braintree provides a single seemless integration across credit and debit cards, digital wallets including partnerships with Apple Pay and Google Pay. Competitive landscape is evolving but PayPal continues to maintain a dominate share of digital wallet users and growth. Merchant payment processing continues to be highly competitive between existing participants. Barriers to entry remain high due to the capital needed to enter the industry and provide end to end services.

To

tal

Fe

e

Typ

ica

l T

ran

sact

ion

Fe

e1.

4% +

.10

to

5.0%

+ .

3025

- 7

5 bp

sV

arie

s w

ith

Sub

scrip

tion

15 -

50

bps

Co

mp

an

y

Dig

ital W

alle

ts /

B

row

ser

Hos

t C

ard

Em

ulat

ion

Gat

eway

+

Ser

vice

s (F

raud

, A

naly

tics,

R

epor

ting,

ect

)F

ront

End

B

ack

End

A

cqui

ring

Ban

kC

ard

Net

wor

kIs

suer

Ban

k

B2B

C

omm

erci

al

Pay

men

t S

ervi

ces

B2C

C

omm

erci

al

Pay

men

t S

ervi

ces

Pay

pal

Vis

a (V

isa

Che

ckou

t, V

isa

Dire

ct)

Mas

terc

ard

(B2B

- S

mar

t D

ata,

eP

ayab

les,

HS

A C

ards

, A

CH

)

Fis

erv

Glo

bal P

aym

ents

Net

wor

k

Fid

elity

Nat

iona

l Inf

orm

atio

n S

ervi

ces

Squ

are

+ C

ash

App

App

le (

App

leP

ay)

Goo

gle

(And

roid

Pay

)

Sam

sung

(S

amsu

ng P

ay)

Fac

eboo

k (M

esse

nger

P2P

+ M

arke

tpla

ce)

Zelle

(M

ajor

Ban

k P

2P P

artn

er -

BO

A)

Str

ipe

Am

azon

Pay

EV

O P

aym

ents

Am

eric

an E

xpre

ss

Dis

cove

r F

inan

cial

Ser

vice

s

Maj

or N

orth

Am

eric

an Is

suer

s (1

)

AD

P

Pay

Che

x

Fle

etC

or T

echn

olog

ies,

Inc.

Wex

, In

c.

Maj

or

No

n U

S P

rovi

der

s (2

)

Pay

men

t fa

cilit

ator

(P

ayfa

c)P

rimar

ily p

ropr

etia

ry b

rand

car

d pa

ymen

ts.

Am

ex n

on b

rand

ed G

loba

l Net

wor

k S

ervi

ces

segm

ent

gene

rate

d 6.

4b in

net

rev

enue

but

sho

wed

dec

lined

Y/Y

.(1

)M

ajor

US

issu

ers

prov

idin

g m

erch

ant

paym

ent

serv

ices

incl

ude

Cha

se M

erch

ant

Ser

vice

s, B

oA,

Wel

ls F

argo

, C

iti a

mon

g ot

her

regi

onal

ban

ks.

Non

e of

whi

ch h

ave

a si

gnifi

cant

sha

re o

f dig

ital w

alle

t us

ers

in t

he u

nite

d st

ates

. (2

)M

ajor

Non

US

pro

vide

rs in

clud

e M

erca

doLi

bre,

Inc.

(La

tin A

mer

ica)

, S

tone

Co

Ltd

(Bra

zil),

Pag

Seg

uro

Dig

ital L

td (

Latin

Am

eric

a),

Ady

en (

Eur

ope)

, B

aidu

Inc

(BaI

du W

alle

t),

Alib

aba

(Ali

Pay

), T

ence

nt (

we

chat

pay

).

Tran

sact

ion

Pro

cess

ing

75 -

250

bps

Pe

r tr

an

sact

ion

Fe

e

.10

- .5

0 ce

nts

Public Comps

Ass

ess

me

nt

+ I

nte

rch

an

ge

Pa

yPa

l's T

ran

act

ion

Ta

ke R

ate

, N

et

of

Inte

rch

an

ge

& S

ub

Pro

cess

or

Fe

es

= ~

1.4%

(In

clu

de

s P

2P T

PV

)