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Structural Disruption

Questions › Category: Business Quadrant › Structural Disruption
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Wendy Tan asked 3 years ago
Hi Victor, How can we be more certain to confirm if a company is facing structural disruption risk? Any other signs besides decreasing revenue / market share to look out for? Eg Paypal with slower growth revenue but decreasing active users (contributing to more than 90% of revenue from merchants and consumers) is facing more competition from bigger companies like Google, apple with bigger user base / network.  Though paypal has wide network, its low switching cost and other unfavorable observations like CEO stepping down end 2023,  COO resignation and 2 times more insiders sales than purchases in last 3 years may also suggest a value trap at current historical low price of $62.  kind regards, wendy 
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Victor Chng Staff answered 3 years ago
Hi Wendy,   To be certain of understanding structural disruption, it depends on your understanding of the business and the industry. That is also why we mentioned staying within your circle of competence. Alternatively, you can study the industry to increase your understanding. 
As for PayPal, I don't think they are facing any structural disruption, but rather, they are facing increasing competition from new and better payment systems. If I want to track this company, I will look at the company revenue trend; if it keeps decreasing, it may means that competitors are taking away their market share. 
Wendy Tan replied 3 years ago

Thanks Victor as always for your advice :)

I had the wrong understanding of structural disruption. Now with better clarity and more research, I agree that paypal’s main challenge is facing increasing competition from other big players.

In last 10 years earnings, Paypal revenue trend has been increasing but the growth has slowed down from double digit (in past 9 years) to single digit last year, likewise for gross profit and EBIT (both increasing in past 9 years but reduced 2-4% last year). Overall, its balance sheet still look healthy with < 1 Debt equity ratio, sufficient cash to cover LT debt and increasing FCF trend. If I were to view paypal as a value stock than a growth stock now, will using ave PE of past 10 year still accurate to assess its valuation?

Kind regards,
wendy

Victor Chng Staff replied 3 years ago

Hi Wendy,

Your analysis view on PayPal is correct. It is more of a value growth stock. Their five-year EBIT and profit growth are decent at a CAGR of 17.1% and 14.9%, respectively.

You can still use the 10Y average as a gauge, but you need to factor in the growth using PEG compared to current PE. Alternatively, you just need a higher margin of safety. A rough look at the PE is around 16.6x which 14.9% CAGR growth, the PEG is 1.11x which seem fair. If you want better value then wait for PEG drop below 1x.

Wendy Tan replied 3 years ago

Interestingly, for PEG to drop < 1x, that would mean PE of < 15 which somehow fits into buffets 10x pre tax valuation :)

greatly appreciate your advice!

regards
wendy

Victor Chng Staff replied 3 years ago

You are right Wendy. An added advantage is that PayPal is also reducing share counts.