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SUMMARY
Parkev Tatevosian, CFA, discusses his decision to exit his PayPal position after holding the stock for several years and experiencing a lack of turnaround. He outlines the initial investment thesis, the factors behind his disappointment, and the rationale for reallocating capital to other opportunities.
MAIN POINTS
- The decision to sell PayPal stock was made after holding for several years with minimal turnaround and a small loss.
- PayPal's primary advantage lies in online shopping convenience, which initially motivated the investment.
- The company’s large user base created a virtuous cycle between consumers and merchants, fueling initial optimism.
- Leadership instability and lack of competitive progress, combined with post-pandemic economic shifts, led to stagnating stock performance.
- A declining cash allocation in the portfolio and better perceived opportunities prompted the decision to reallocate funds.
- Despite believing PayPal is undervalued, a lack of confidence in management’s ability to realize potential led to the sale.
DETAILED ANALYSIS
The decision to sell PayPal stock followed an extended period of underperformance and strategic disappointment. Initially, the investment was based on PayPal’s significant convenience advantage for online shoppers, particularly during the pandemic when e-commerce activity surged. The company’s ecosystem, with over 400 million monthly active users, fostered a virtuous cycle: widespread consumer adoption encouraged more merchants to accept PayPal, which in turn reinforced its utility for users.
This network effect suggested the potential for PayPal to achieve growth reminiscent of established payment giants, with the possibility of expanding its user base and profitability significantly.
However, the anticipated growth failed to materialize in the years following the pandemic. The reopening of the economy reduced the frequency of online shopping, directly impacting PayPal’s transaction volumes. Compounding these challenges were internal issues, including leadership turnover and insufficient progress in defending against increasing competition in the digital payments space.
These factors contributed to a prolonged stagnation in PayPal’s share price, with a notable decline of 82% over five years, most of which occurred in 2022.
From a portfolio management perspective, the declining proportion of cash holdings further influenced the decision. While previously able to fund new investments from a substantial cash reserve, the reduction to less than 10% prompted a reassessment of existing equity positions. Despite a discounted cash flow valuation indicating that PayPal shares were undervalued relative to their fair value estimate, confidence in the management’s ability to unlock this value was lacking.
Consequently, the capital was reallocated to opportunities perceived as offering better risk-adjusted returns.
LINKS
- YouTube channel membership for exclusive perks and access to spreadsheets and Discord.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on a six-step investing framework.
- Discounted access to Fiscal.ai for investment research.
- Webull sign-up link with bonus shares offer.
- Subscription link for Parkev Tatevosian's free monthly Substack newsletter.