PayPal Uses AI To Improve Its Productivity

Long gone are the days back when Tesla Inc TSLA CEO Elon Musk wanted to rebrand the digital payment company as X.com two decades ago when he participated in its inception. Musk sees X as the letter that shows the power to change the world. Back then, he believed it can take over the world’s financial system but now, X is the rebranded logo of Twitter while PayPal Holdings Inc PYPL ‘merely’ operates different payment-related systems in the world as we know it. While this week, its competitor and world’s leader in digital payments, Visa V is expected to report a strong business momentum as it capitalized on recent macroeconomic and industry headwinds, AI still hasn’t made any life changing transformations at PayPal but its CEO recently stated it greatly improved its productivity.

The Power Of A.I. – Chapter One

It’s no secret that PayPal focused on increasing its operational efficiency in the first quarter and looked for ways AI can help the company save money. Already during the first quarter, PayPal lowered its technology and development spending 12% YoY. But last week, CEO Dan Schulman kicked off a recent virtual CEO discussion stating that A.I. has made one of the company’s code development teams as much as 30% more productive. Unlike Amazon.com AMZN and Microsoft Corporation MSFT, PayPal seems to be keeping a low profile on the AI front. But Schulman did tease about exciting new opportunities that come with this developing technology, in terms of creating more value to customers. And PayPal has many kinds of customers.

PayPal's Different Services Make It To Be More Than A Simple Digital Wallet

In 2022, het most widely accepted digital wallet in North America and Europe had 433 million active accounts and processed $1.36 trillion of total payment volume.

But there’s much more to PayPal than that. For example, there's Braintree a processing solution for merchants to accept digital payments whose TPV jumped 40% YoY in 2022 to total $408 billion, growing faster than another segment. Just to name one, and one that makes a significant part of its business.

PayPal Joined Forces With Microsoft and Amazon

Venmo, the peer-to-peer payments network is also under PayPal’s umbrella. It’s a smaller division as its total payments volume in 2023’s first quarter amounted to $63 billion, but it also expanded 9%. And this was before an enhanced partnership with Microsoft Corporation was announced, one that will allow customers pay in multiple ways, with Amazon.com users already being able to pay for their digital purchases with their Venmo balances. After its separation from eBay Inc EBAY, one can argue that PayPal is an even better, certainly more powerful, company.

Macrosensitivity Is There

Slower revenue growth that shaped PayPal’s 2022 was simply a result of a post-pandemic crash as back when COVID-19 was holding consumers hostage at their homes, PayPal’s business was firing across all cylinders. Its revenue grew 9% during the first quarter of 2023, and the market just isn’t used to seeing single digit gains from PayPal, and punished its stock as a result, as simple as that. In simple words, YoY financial comparisons are not a reliable tool in such circumstances when consumer behavior was undergoing such drastic changes triggered by unforeseen outside factors. But, because PayPal’s core business model is tied to more towards discretionary purchases, recessionary headwinds are unavoidable.

New Leadership Could Be The Answer?

Dan Schulman got behind PayPal’s helm before its eBay separation. Unarguably, Schulman’s leadership transformed the organizational structure, brought new users and drove impressive TPV. At  one point in July 2021, the stock rose 740% over a period of only six years. However, capital-allocation does not seem to be Schulman’s strong suit as it’s hard to evaluate the exact value that was brought to the company by the sizable acquisition decisions he made. PayPal is also to this day an equity holder of Uber Technologies UBER and Mercado Libre MELI but aside the strategic integration, there's an ongoing debate if these ties, along with its $4 billion purchase of Honey and the $2.7 billion purchase of Paidy, are disabling the company from making better use of its capital. AI is certainly a costly commitment but one that promises to change business and the world as we know it, and therefore, a window of what seems to be endless growth opportunities.

Recap

All in all, the challenging macroenvironment is pressuring top line growth but PayPal is still making good progress on boosting its profit margins. After a period of steadiness, PayPal is opening a margin expansion chapter and we are yet to see how it will use AI for this purpose. For the full year, management has guided for a non-GAAP EPS growth at around 20% on the back of similar revenue growth. A 30 to 40% improvement in productivity certainly promises to result in significant financial as well as qualitiative improvements.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.