5 Deutsche Bank Research Rating Buy North America Company PayPal Dee! evtars Bloomberg Exchange Tckar PyPLoa PYLUS” NMS PYPL ™r Payments, Processors, & IT Services Weighing KPls to Achieve Updated Guidance Can PYPL achieve its guidance? Over the last two earnings reports, PYPL has taken down forward guidance with many investors wondering if the updated forward guidance is finally achievable (investorconfidencelow).Onits|ast earnings report, PYPL materially cutits outlook for net new active accounts (NNAs) without changing the forward outlook of 23-35 which leads to the question if share gains, engagement and increasing average revenue per user (ARPU} can make up the shortfall in accounts. We est. PYPL had ~32.4% share of the global eComm market in FY21 (ex. AMZN & China) and our market share analysis suggests the company has continued togain share with most, of the guidance revision in FY22 likely being due to difficulty modeling the significant pull-forward experienced through the pandemic. Further, engagement ‘and ARPU should continue to benefit from thenew super app and suite of products! services being rolled out as well as the purging of unprofitable accounts. We analyze in this report how much anticipated share gain, engagement growth (ex. Bay) and ARPU expansion will be needed to reach future guidance and regain investor confidence in the PYPL story. The reality is PYPL isnow a “show me" stock, Buy, Strong market share gains Based on our detailed market share analysis, we est. PYPL gained ~1.9ppts of Global eComm market share in 2019 to ~21.2% before the pandemic which accelerated ~7.6ppts to ~28.9% in 2020 and ~3,5ppts to 32.4% in 2021. Although ‘we expect share gains to slow, we do not see any signs that PYPL is losing market share. Based on eMarketer data, including travel and events (T&E) but excl. AMZN ‘and China, the market grew ~24% Y/Y in FY21 and should grow ~10% over thenext few years which means PYPL would need to gain ~3.4ppts of share to ~35.7% in FY22 and ~4.7pptsin FY23 to ~40.4% tohit the company's top-line guidance. Ifthe market rate of eComm growth is higher than anticipated, PYPL would need less. share gains and vice-versa. As a result, the market rate of growth will be important to monitor going forward as well as PYPL’s ability to continue to capture share at ‘a more gradual pace which looks reasonable, in our view. Driving engagement Although net adds are expected to return to pre-pandemic levels in FY23 and beyond, PYPL expects engagement to increase from current levels going forward. ‘Assuming the company's lower net adds forecast, we estimate PYPL will need to Date 9 February 2022 Company Update Price at Feb 2022 (USD) r2298 Price target 200.00 S2-meck ange 853 Valuation & Risks Bryan Keane Research Analyst +41-415-617-4246 Korey Marcello Research Analyst ++1-904-527-6235 Nate Svensson, CFA esearch Associate ++1-801-787-2208 Hersh Shinte Research Associate Deutsche Bank Securities inc. Deutsche Bank does and seeks todo business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P} 051/04/2021.9 February 2022 Payments, Processors, & IT Services PayPal drive ~11%V/Y growth in engagementin FY22and ~13% Y/Y in FY23 through FY25 which compares to ~10% IY growth in FY21. However, eBay has beena significant drag to engagement as engagement excluding eBay grew ~20% YIY in 2021 and ~18% YIY in 3021 and 4021. As eBay revenue headwinds stabilize through FY22, we est. PYPL would only need to achieve engagement growth excluding eBay of 16% YIY in FY22 and ~15% YIY in FY23 moderating to ~13% Y/Y through FY25 as nets adds gradually rise to more typical annual levels (chum should drop dramatically in '23-25). With a more active user base expected and multiple products and services now available in the app and being rolled out, we believe ‘engagement can stay robust at elevated levels ex eBay. Increased monetization and ARPU We est. ARPU needs to grow ~9% YIY in FY22 and ~13% YIY in FY23 in order for PYPL to hitits guidance, compared to ~2% YIY growth in FY21 or when excluding ‘eBay, we est. PYPL would need ~13% Y/Y and ~14% YIY growth in FY22 and FY23, respectively, up from ~10% Y/Y growth in FY21.. Beyond the lower drag from eBay, ARPU should benefit from the super app where users have double the ARPU and ~25%4less churn. Further, PYPLis focusing on the most profitable users asitcleans up non-profitable and illegitimate accounts and pulls back from incentive-drive ‘campaigns with low ROIs which should further boost ARPU over time. We also ‘expect better monetization of services such as Venmo to contribute to expanding ARPU and look forward to PYPL adding additional monetization opportunities toits base like investing. PYPL has the opportunity to cross-sell users with its expanding set of interconnected services but in our view, could also benefit from acquiring ‘complementary assets that provide additional cross-sell opportunity to expand ARPU, tect pRSEDIREMSayMtnaigSuneer Sear Sen9 February 2022 Payments, Processors, & IT Services PayPal Continued share gains key component of investment thesis Looking at the historical market share trends for PYPL, we estimate PYPL captured ~32.4% of the total global eComm marketin 2021 (excluding China, AMZN as well ‘as P2P volumes), up from an estimated ~28.9% in 2020. Based on our overall rate ‘of market growth assumptions, we estimate PYPL will need to drive additional global market share gain by ~3.4ppts to ~35.7% in FY22 to meet guidance. Further, ‘we estimate PYPL will need to further expand market share by ~4.7ppts, ~5.3ppts, and ~6.1ppts in FY23-FY25 in orderto reach the company’s mid-term guidance. It is important to note, overall market growth rate assumptions used in this analysis, may prove to be conservative given the secular tailwinds that have propelled ‘eComm since the start of the pandemic. If the overall eComm market grows faster than expected, PYPL will need to see less market share expansion in order to meet numbers. Importantly, our primary share gain analysis includes both core physical ‘goods and travel/events eComm market (excl. AMZN and China), but we have also looked atan additional scenario that excludes travel/events and focuses onlyon the physical goods eComm market (explained in greater detail below), ‘While we believe PYPL is stil gaining share in core checkout, both PYPL and the ‘eComm market are getting larger and itis becoming incrementally more difficult to add enough TPV each year to maintain the same growth rates due to the law of large numbers. In order for PYPL to reach its guidance the company will need tocontinue taking share at the physical POS, accelerating adoption of PYPL checkout solutions from strong net new adds and engagement, and further driving engagement through the company's superapp, among other things. Beyond Comm, we expect PYPLwillbe able todrive growth by going after the physical in-store market through QR codes and selling additional value-added products and services through its super app such as instant deposits, bill pay, and investing. Overall, PYPL has strong penetration in the core physical goods and travel/ticketing Comm market which has accelerated throughout the course of the pandemic and we see potential for ‘growth to remain elevated due to continued share gains through company's full suite of solutions and strategy to move up the sales funnel. In addition, we see a large opportunity that extends beyond the physical goods and traveVevents ‘Comm market where PYPL currently has low penetration. Global Market Share Analysis ‘We estimate that the total global eComm market (incl. physical goods and travel/ ‘events; excl. China and AMZN) represented ~$2.5tm in 2021 and will grow to ~ $2.7 in 2022 and ~$3.6trn by 2025. Our analysis includes travel/events which have weighed on growth since the start of the pandemic, but which are beginning ‘to show signs of recovery. Looking only at the eComm physical goods market (excl China and AMZN), we expect growth of ~9% Y/Y in 2022, representing a notable deceleration from exceptional growth of ~24% Y/Y and ~13% YY in 2020 and 2021, respectively. For the total market, we see growth continuing to abate and returning closer to historical growth levels of ~10%YIY, ~9% YIY. and ~9% Y/Y in 2023-2025, respectively, due to harder comps that should partially offset by improving travel! ‘events trends, ‘Pinuatincda Wisusle Waumistian tows. Pane 39 February 2022 Payments, Processors, & IT Services PayPal Figure 1: Global eComm market Global Market Analysis (DB Estimates) Save Bante akan sang US ean a et Se Sa WA Weestimate PYPL captured ~32.4% of the total global eComm marketin 2021 and ~42,4%of the physical goods eComm marketin2021 (both excluding China, AMZN as wellas P2P volumes), both up materially vs 2020. Further, we estimate that PYPL will gain ~3.4% of share in the total Comm market and ~4.0% of share in the physical goods eComm market, reaching market shares of ~35.7% and ~46.4%, respectively. As mentioned above, our analysis suggests PYPL must focus on driving further share gains in FY23-FY25 in order to hit our estimates and remain in-line with mid-term guidance. Figure 2: PYPL global eComm market share analysis Se xl.P2P, in-store, | PYPLShare of Global Physical | PYPL Global TPV PYPL share of Global Total, Period | PvPLTotal ebay, and ‘Goods ecomm Market (Excl. | Excl. P2P, In-store (eComm Market (Excl. AMZN {sn)_| tv v/v] rravel/events _v/v| __aMmzNand china) andesay _v/Y and china) rose | 32890 KL $1609) 23%| 70.9% $1862 2% S18% rome | sae sf gaan 23% aK $1505 aK 45.8% roe | ism sf sats 2a 533% su2s 2% 00% rove | S152 21% $000 20% 6.0% sor 2% 35.7% von | size mf gst a7 aK $807 39% 320% rom | $336 sf $548 4% 3ar% $580 aax| 29% mr | siz ef sare as 28% se4 22% 2% pow_| $578 27% $339 23% 30.0%, $356 28% 19.3% tect a a9 February 2022 Payments, Processors, & IT Services PayPal Figure 3: PYPL Global Physical Goods eComm TPV Growth vs. Market PYPL Global Physical Goods eComm TPV Growth ex-eBay %* aoa [noise | aovon | aon [moe | ame | mame | (ase Gita Physal ood cCorm Growth exchna/AMEN DKK a ™ ™ PPL Gbbal TV Growth ep2rfmstreleBayTBE MKT me BN ge § Sec: Compa cers Dass mt er aaa Pane 59 February 2022 Payments, Processors, & IT Services PayPal Figure 4: PYPL Total Global eComm TPV Growth vs. Market PYPL Total Global eComm TPV Growth ex-eBay ial Total eComm Growth exhina/AMEN 1386 11% a ae ao 10% om * PVP Gloal TP €x929/n Store/eB3y me KKK Engagement trends set to improve Although net adds are expected to return to pre-pandemic levels in FY23 and beyond, PYPLis turning its attention to increasing engagement from current levels, going forward. Assuming the company’s lower net adds forecast, we estimate PYPL will need to drive ~11% Y/Y growth in engagement in FY22 and ~13% YIY in FY23 through FY25 which compares to ~10% YIY growth in FY21. We believe itis important to note that eBay has been a significant drag to engagement as engagement excluding eBay grew ~20% YIV in 2021 and ~18% YIY in 3021 and 4021. AseBay revenue headwinds stabilize through FY22, west. PYPL wouldonly need to achiove engagement growth excluding eBay of ~16% Y/Y in FY22 and ~15% IV in FY23 moderating to ~13% IY through FY25 as nets adds gradually rise ‘to more typical annual levels (churn should drop dramatically in ‘23-25). fect ee Ly9 February 2022 Payments, Processors, & IT Services PayPal Figure 5: PYPL Engagement Trends SEs apy aba ash be ae ae be ae aut ae fe Ge Figure 6: Trends in Transactions Per Active Account ‘Transactions/Active Account SPS IFIP SEPP IIPPSISS New net add guidance places even more emphasis on engagement Since the beginning of 2020, PYPL has added ~121m net active customers ‘equating to ~15m per quarter {inclusive of ~4.5m illegitimate accounts that were ‘excluded in 4021). This represents impressive growth for the company and a step ‘change from PYPL’s pre-pandemictrajectory, Over the past year, PYPL has pursued a strategy to retain customers most likely to churn while leaning into customer acquisition via incentives which have materially driven costs up. However, PYPL recently took down its mid-term outlook for active accounts of ~750m by FY25 while also setting a lowerbar for FY22at ~15-20mnetadds. Thisessentially equates tonew guidance of ~550m over the same period (~30-40m annually equates to ~6 years of net adds lost). This net account guidance is about half of the company's prior guidance set on its Feb 2021 analyst day through 2025 with PYPL now turning its focus to sustainably increasing engagement and raising ARPU. Consequently, following 49 million in net adds in 2021, we are expecting ~18 million in FY22 (vs. PYPL guidance of ~15-20 million), before rising to ~30 million in FY23 and ~34 million in FY24-25, within PYPL's guidance of ~30-40 million per year thereafter. ‘Pinuatincda Wisusle Waumistian tows. Pane?9 February 2022 Payments, Processors, & IT Services PayPal This is expected to result in growth in transactions per active account to slightly accelerate going forward. Figure 7: PYPL quarterly net new adds Higher engagement ultimately drives higher RPU We expect PYPL's shift to emphasize engagement to result in higher average revenue per user (ARPU) compared to the prior two years. Given PYPL's revenue guidance of ~15-17%, We est. ARPU needs to grow ~9% YIY in FY22 and ~13% Y/Y in FY23 in order for PYPL to hitits guidance, compared to ~2% YIY growth in FY21 Further, when excluding eBay, we est. PYPL would need ~13% YIY and ~14% YY ‘growth in FY22 and FY23, respectively, up from ~10% YIY growth in FY21. As the drag from eBay dissipates, there are additional benefits from wide acceptance for PYPL's digital wallet alongside higher engagement on the Super App, with Super ‘App users having double the ARPU of the average user with ~25% lower churn, Plus, as PYPL focuses on more profitable users and cleans up illegitimate accounts, this should resuitin furtherimprovementin engagementand ARPU. We alsoexpect better monetization of services such as Venmo along with the company's new to contribute to expanding ARPU and look forward to PYPL adding additional ‘monetization opportunities to its base like investing. PYPL has the opportunity to ‘cross-sell users with its expanding set of interconnected services but could also benefit from acquiring complementary assets that provide additional cross-sell ‘opportunity. fect pRSEDIREMSayMtnaigSuneer Sear Sen9 February 2022 Payments, Processors, & IT Services PayPal Figure 8: PYPL ARPU by FY Revenue Per User RPU total company COOLS 6199S TARTS 76.21 Growth YY LI 884% 129% RPUEtch eBay 59975 66'S 474 Growth YY 26 13.786 Figure 9: ARPU ex-eBay RPU ex-Ebay sss00 7500 > ye PESIESPSPEISISISISEISS Soy Figure 10: PYPL digital wallet acceptance Digital wallet acceptance among 500 largest online retailers across North America and Europe awe: mga see ‘Pinuatincda Wisusle Waumistian tows. Pane 99 February 2022 Payments, Processors, & IT Services PayPal jure 11: Early signs of PYPL super jpp's success. Pc ence tas Daa Sse eee Piece iat Pree ete oer Ts ARPA : + Users engaging on the mobile app Shopping exhibit -25% less churn *700% merchant leads + Digital wallet and BNPL users deliver BLARPA of checkoutonly users ir] @ ~~ raat ea 7 +40% first-time users ‘each additional product a user engages with In-app donations ‘= App penetration is increasing, but still +350% first-time users” meaningful opportunity to drive bigher my Bill pay + Opportuity to cross-sell users with £8) eae eos expanding et of inerconnected feaures sac: Campy cere Revenue growth trends with eBay impact abating Although eBay represented a ~Sppts headwind to revenue growth and a ~Sppts headwind to TPV growth in 4021, the impactof eBay will fully rolloffaftera ~$400m impact in 1022 and a ~$200m impact in 2022 which should help driving accelerating growth rates through the year along with improving take rates. This ‘equates toa ~4pptsimpactin FY22. Overall, ex-eBay we estimate that PYPLwillsee revenue growth of 19.9% YIY, 20.7% YIY, and 20.7% YN, in FY22, FY23, and FY24, respectively. Figure 12: PYPL Revenue Growth Trends, Revenues aos 2067s, as ome) eos ‘aypaltotalveve aio Siosn0 sisjess0 GisAsLO Gav 720 Griasao Gissn0 Sayaone 5083 S225 vy growth V3% 106% RAN ISON 2M BINS SAN 2028 boy take rote AON 390% AUN AON OOK OKIE 2K BN ps yy B% 1205 -06k 4-72.45 45 ° ° fey contribution $2027 $23652 Seo $2267 aes $7090 $15223 S160 $701 —_—g7OOA vy growth 0% 95M ON SAN TZN ASA GAN LEN 27K, Nofrers 260% 220% 200% «TWO OK BONER 20K LI (ay rev hesdwind (si7a) Gass sis 7 (51386) $3009 ($2668) (553) (5953) (519.7) ‘rev heodwind 02% 21% GIN KLSIK LEN ORK ON. ret rev growth ex eBay mk aK SK OK OTK Diterent 1a 95K OK OK OK, Still seeing operating leverage ‘With transaction expense as a basis point of TPV expected to be in the mid-80s in 2022 and estimated to moderate slightly over time as well as transaction and loan loss being in the ~9-10bps range, margins are expected to decline from ~24.8% in 2021 to ~23% in 2022 also impacted by significant capital outlays and investments into new products and services. In addition, based on our estimates, PYPL may Pane 10 pRSEDIREMSayMtnaigSuneer Sear Sen9 February 2022 Payments, Processors, & IT Services PayPal need to deliver up to ~30-40bps each year from 2023 through 2025 to deliver on its EPS mid term guidance of ~22%. This would imply non-transaction related ‘operating expenses growing mid-to-high single digits in 2022 and low-to-mid- teens thereafter through 2025. If PYPLis able to deliver on its outlook for TPV and revenue growth, we feel more comfortable on the margin side of the equation as we continue to see significant opportunity to drive sustainable operating leverage across the business. In addition, PYPL has significant FCF generation and although astrategic deal seams unlikely, we expect the company to potentially pursue more share repurchases and continued tuck-in acquisitions. ‘Pinuatincda Wisusle Waumistian tows. Pane 11Z1 960g “2U] Sanuuno9g yueG ayosINeg [Figure 13: PYPL Income Statement PFs ee x 7. . a. + — . 232 cs 28 = * =e a3 a. aa i 8 —— i = = — = : ee Na ee9 February 2022 Payments, Processors, & IT Services PayPal Appendix 1 Important Disclosures *Other information available upon request [Disclosure checkist Company Ticker Recent price* Disclosure PayPal PYPLOO 720.26 (USD) 08 Feb 2022 7, 8, 14, 18 ‘nvoimaton sourced rym Deutsche Ber subeucorbanies, nd omer sources For dscosures parang io reoonmendovansorcernatos ado or occuriog thor han the nay, ‘ibet of athe moses pukebadcompany repre vstou gsi cscosre atop pageen our setae athe hasseeh ah confececNOecloes in ms orn akon es sone oo i aah as Des Bsn nos Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 7. Deutsche Bank andior it affiliate(s) has received compensation from this company forthe provision of investment banking or financial advisory services within the past year. 8. Deutsche Bank andlor its affiliates) expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months. 14, Deutsche Bank andior its affiliate(s) has received non-investment banking related compensation from this company within the past year. 15, This company has been a client of Deutsche Bank Securities Ine. within the past year, during which time it received non-investment banking securities-related services. Important Disclosures Required by Non-U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking oF financial advisory services within the past year. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https:l/research.db.com/Research/Disclosures/EquityResearchDisclosures. Aside from within this report, important risk and conflict disclosures can also be found athttps://research.db. com/Research/Disclosures/Disclaimer. Investorsare strongly ‘encouraged to review this information before investing Analyst Certification ‘The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any ‘compensation for providing a specific recommendation or view in this report. Bryan Keane. aaa Pane 139 February 2022 Payments, Processors, & IT Services PayPal Historical recommendations and target price: PayPal (PYPL.OQ) (es ofc20ar2022) 400.00 ‘Current Recommendations By Hold Sell a Not Rated ‘Suspended Rating 8 i! “Analyst sn longer at © 20000 Deutsche Bank 3 100.00 0.00 wane san'20 w20 Jan'21 ut an 22 Date 1. 03/20/2019 Buy, Target Price Change USD 120.00 Btyan Keane 6. 12/21/2020 Buy, Target Price Change USD 275,00 Bryan Keane 2 O7M6!2019 Buy, Target Price Change USD 127.00 Bryan Keane 7, 02/12/2021 Buy, Target Pre Change USO 310.00 Bryan Keane 3. 04/21/2020 Buy, Target Price Change USD 147.00 Bryan Keane 8. 07/08/2021 Buy, Target Price Change USD 360.00 Bryan Keane 4, 06/01/2020 Buy, Target Price Change USD 183.00 Bryan Keane «8, 11/09/2021 Buy, Target Pre Change USO 260.00 Bryan Keane ‘5. 07/90/2020 Buy, Target Price Change USD 234.00 Bryan Keane 10. 02/02/2022 Buy, Target Price Change USD 200.00 Bryan Keane Equity Rating Key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total share-holder_—"* vs return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield), = ‘we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder aH return, we recommend that investors sell the stock. » Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or "® Sell. oS Newly issued research recommendations and target prices: supersede previously published research. hohe ee Ly9 February 2022 Payments, Processors, & IT Services PayPal Additional Information ‘The information and opinionsin this report were prepared by Deutsche Bank AG or one ofits affiliates (collectively ‘Deutsche Bank’). Though the information herein is believed to be rellable and has been obtained from public sources believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness. Hyperlinks to third-party websites n this, Teport are provided for reader convenience only. Deutsche Bank neither endorses the content nor is responsible for the accuracy oF security controls of those websites. 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