a la carte vs. all-you-can-eat buffet (PYPL, NFLX)
WG’s View: a la carte vs. all-you-can-eat buffet: No, we are not talking about restaurants. As we await Paypal results today, we wanted to compare and contrast Paypal vs. Netflix. Since NFLX reported its Q1CY22 earnings and subsequently lost more than a third of its market value, Paypal has seen a decline in its stock price (not to the same extent) but because of being bucketed in the same category. To a certain extent, yes, PYPL also guides and relies on growth in active users (active subs for NFLX) and both of them had seen outsized growth in active users during the pandemic followed by overestimation from extrapolation of pandemic era trends to FY22 and beyond and both of them missed Q4FY21 guidance and had to reduce Q1FY22 guidance. Both of them talk about focusing on increasing user engagement rather than relying on pure active user growth moving forward. Here’s where the a la carte vs. all you can eat buffet difference comes into play. NFLX is as you can tell, an all-you-can-eat buffet model. NFLX doesn’t charge different subscribers different monthly rates based on the number of movies or shows they watch and so when NFLX talks about increasing user engagement, we are not sure how that will convert to revenues even if it has the best content in the world for the next few years. Hence subscriber growth is the only growth option for NFLX and its key US and EU markets seem to be highly penetrated for streaming services. Paypal on the other hand is a different story with its a la carte business model. Paypal charges users on a per transaction basis and so Paypal’s revenues have and will increase with increasing engagement. PYPL has increased transactions per active subscriber at a CAGR of 7% for the last three years. Moreover, PYPL has one more additional avenue for growth which is value per transaction since it charges on a percentage of the value of a transaction. Not only has the number of transactions per user increased over the years, but payment value per transaction has also increased at a CAGR of 3% over the last three years. Moreover, in the last few weeks, the high valuation bear argument against PYPL also doesn’t hold true since it trades at a fair to cheap valuation compared to its peers, its own historic multiples, and growth adjusted valuation ratios. As we await Paypal results today, we acknowledge that even the slightest negative comment from the management could cause the stock to slide as markets are very trigger happy these days given what we have seen over the last couple of months, however, we are not too worried about Paypal’s mid-long term prospects at its current valuations and hence wouldn’t be panic sellers if there was some negative comment from the management.