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Research Analysts:

Ryan Funk Matt Tolton ryan-c-funk@uiowa.edu matthew-tolton@uiowa.edu Garrett Grimshaw Nile Ringen garrett-grimshaw@uiowa.edu nile-ringen@uiowa.edu

Company Profile PayPal Holdings, Inc. is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. The company earns revenues primarily by charging fees for completing payment transactions for their customers and other payment-related services that are based on the volume of activity processed on their payment’s platform. The company’s combined payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom and iZettle products, compose their proprietary Payments Platform which operates in more than 200 countries and 25 currency denominations worldwide. Price Data 52wk range $70.22-$108.54 Analyst Consensus 1yr target $104.37 EP/DCF Model Price $107.99 Key Statistics Market Capitalization (B) 127.27 Shares Outstanding (M) 1,184 Beta 1.036 Dividend Yield 0% Est. 5yr Growth 43.73% Price/Earnings (TTM) 40.57 Price/Earnings (FY1) 30.60 EPS (TTM) 1.71 EPS (FY1) 2.62 Profitability Operating Margin 14.36% Profit Margin 13.31% ROA (TTM) 4.89% ROE (TTM) 13.11% Transactions Payment transactions (M) 9,871 Transaction Growth (FY1) 27% Revenue per Transaction (M) 1.389

Current Price $106.46 Target Price $102-111 Investment Thesis

• PayPal is poised to continue to capitalize on growth in digital and mobile payments by offering a large portfolio of products and services to across more than 200 countries and 25 currency denominations worldwide • PayPal is highly dependent on consumer confidence and spending behaviors, likely hindering their ability to grow and profit at their full potential in times of economic downturn • Current macro-economic indicators such as decreasing consumer sentiment and flattening yield curves present potential for sustained economic slowdown and decreased demand for payment processing technologies • After experiencing growth greater than 30% in the past year, PayPal is currently trading above both our target price and the analyst consensus, limiting upside potential for the company • The associated risks and negative landscape of the overall economy and financial services industry outweigh the upside potential for PayPal’s digital processing capabilities, resulting in a strong “Hold” rating for the time being

1-year Stock performance vs S&P 500

Krause Fund Research Spring 2019

Financial Services

Recommendation: HOLD

PayPal Holdings, Inc. (PYPL)

(Figure 1: Google Finance)10

April 11, 2019

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After an in-depth valuation analysis, our team has decided to issue a “Hold” rating on PayPal Holdings, Inc. Our conclusion is backed by our model on which we arrived at a target price range of $102 to $111. Despite outstanding recent growth, and increased utilization of global payment processing, the current risks and negative sentiment associated with macro-economic and industry factors limit PayPal’s ability to grow and profit in the next 6 – 18 months. Our team foresees a period with less favorable economic conditions as compared to recent years, resulting in a modest forecast of growth and adoption of the global payment processing industry’s services as compared to recent years, rather than growing PayPal’s revenue generation to their full potential. We do believe PayPal has a great business model and sustainable revenue stream, but at this time are not a recommending an investment by the Krause Fund.

Due to heavy reliance on the consumer spending, PayPal and the payment processing sub-industry as a whole are highly sensitive to macro-economic forces. PayPal returns have a high correlation with the overall market, as seen by its a beta near one. In recent earnings reports and calls, the company expressed increased focus and caution about the economy. Poor outcomes in Brexit, Venezuela, and the trade dispute with China would prove costly. A couple of macro indicators to watch are the unemployment rate, consumer confidence, growth in real GDP, the Fed Funds Rate and the debt market yield curve. Unemployment Rate The unemployment rate under the Trump administration has hit record lows, and currently hovers around 3.8%11. Employment translates to higher total disposable income and increased consumer spending, which in-turn benefit transaction volumes.

(Figure 2, FRED)11

Consumer Confidence Consumer confidence is a measure of the public’s sentiment regarding the U.S. economy. Transactions in the Financial Services sector are driven by consumer spending.

5-Year Consumer Confidence Index

The CCI has experienced a significant decline since the midpoint of 2018. This implies that the public is demonstrating a growing concern for the well-being of the U.S. and global economies. Going forward, this measurement serves as a precursor to a likely decline in consumer spending and overall optimism. Because PayPal generates revenues by collecting transaction fees from consumers, we incorporated this concern into our model by forecasting a conservative transaction growth rate as compared to industry analysts. Among other factors, an explanation for this confidence decline is the looming trade war between the U.S. and many nations. A resolution to this trade issue will likely result in confidence to again trend upward and transaction volume to see a significant increase. U.S. Real Gross Domestic Product (GDP) Real GDP acts as a key inflation-adjusted indicator for the health of the U.S. economy by measuring the total value of goods and services produced each year. We anticipate the GDP growth rate to decrease to approximately 2.0% in 2019, down from an estimated 3.0% in 2018.

Our assumption is backed by the median estimate given by the FOMC at 2.1 percent3. A key component of the projected slowdown is the trade war induced by the current administration and foreign global leadership and is also largely influenced by cyclical factors. We anticipate seeing continued declines in

Economic Analysis

Executive Summary

(Figure 4: FRED)4

(Figure 3: FRED)12

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GDP growth over the next few years, falling below 1.8% by 2022. U.S. Federal Funds Rate The Fed Funds Rate is one of the most frequently monitored economic variables and it carries a huge implication for firms within the financial services industry. We anticipate the Fed Funds Rate to remain relatively stable at 2.5% in the near future with a considerable chance of a minor decrease.

CME Group forecasts public and economic analyst sentiment towards probabilities of rate changes, with a 27.0% chance of a 25bps decrease in the next 6 months, 70.0% chance of rate stability, and 0% of a rate increase2. The Federal Open Market Committee (FOMC) signaled in its most recent meetings that there are no plans for rate hikes for the rest of 2019 yet has not mentioned anything about a lowered target rate. Current or decreasing rates hinder performance of the financial services industry by decreasing yield spreads, thus negatively impacting profitability driven by interest yields and transaction volume. Although PayPal does not have interest-bearing operations affected directly by yield rates, they are a significant indicator of overall economic well-being and investment volume. Yield Curve Debt market yield rates are a significant indicator of economic wellbeing. Historically, longer term loans have yielded a higher rate of return as compared to shorter term loans. Each of the past 7 instances in which the 10-year minus the 1-year Treasury has been negative, there was a recession within the next 18 months10. Earlier this month, the 10-year minus the 1-year Treasury again inverted.

(Figure 6, Yahoo Finance )5

While this inversion is not a certain statement that a recession is coming, it is important to note that an economic slowdown is likely based on similar historic landscapes. As incentive to invest and lend at longer horizons decreases, the long-term growth and health of the overall economy becomes in question. As a result of this inversion, our group believes the overall health of the economy is decreasing and a slowdown is now more likely than at any point in the past 10 years.

The overall stock market had experienced exceptional growth since the start of 2019, as seen by the S&P 500 returning 18.77% YTD10. While this is very strong performance, it is likely not sustainable. The stock market returns are largely impacted by macro-economic factors and fiscal policy. Rate hikes and debt yields are two indicators of overall market wellbeing and returns. Rate Hikes and Debt Yields Entering 2019, public consensus of the FOMC issuing at least one rate hike, with as many as three rate increases was very high. As before mentioned, in the early months of 2019 this consensus has taken a significant shift, with the likelihood of rate hikes now at presumably zero. This shift will positively impact the equity markets as higher returns are no longer guaranteed by debt securities. Additionally, the yield curve for Treasury securities currently sits low and flatter than most debt investors prefer, especially those will long-term debt horizons. As long as the FOMC’s rate hike outlook remains low and the yield curve remains near inversion, we expect the stock market to continue seeing high investment volume and producing favorable returns as compared to debt securities and other financial assets.

(Figure 5: CME Group)2

Stock Market Prospects

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Rewarding Industries Health Care As gene therapy and other innovative treatments continue to benefit from increased investment and research attention, we expect this industry to outperform leading market indices. Additionally, the continual rise in condition-specific medical devices and treatments within both the private and public sectors will deliver consumer choice, greater volumes, and a generally beneficial industry competition that will allow more companies to take advantage of niche markets. Technology The U.S. economy and market participants have benefitted greatly from technological advances throughout the last decade. We anticipate more companies outside of this sector to demand and utilize technology to advance their own firm specific operations. Additionally, high-level machine learning and artificial intelligence are of very high interest amongst investors. We anticipate this interest to drive investment and growth within this sector leading to favorable returns and the likelihood for future investment opportunities. Industry of Concern Financials Much of the financial sector operates primarily through interest-bearing loans and other financial assets, while deliberately taking operating losses on other services such as consulting and holding physical locations. When the yield curve is flat or inverted, financial firms are forced to borrow at the higher, short-term rates and lend at very similar, and sometimes lower long-term rates to investors. This dramatically impacts the profitability of such firms. The low rates reduce financial firms’ willingness to lend, further reducing transaction and compound interest profits. With rate forecasts remaining at their current levels, we expect the financial sector to underperform as compared to leading market indices and other sectors with less reliance on interest-bearing operations. It is important to note that although PayPal operates in the financial services sector, they have significantly less reliance on interest-bearing operations. PayPal receives most of their revenue from transaction fees and benefit greatly from high volumes of payment processing. When the yield curve is flat, banks have less incentive to loan to consumers and corporations, resulting in less activity and transaction volume. Because PayPal’s profits are so highly dependent upon

economic activity, lower interest rates and flat yield curves do transitively impact the company in a negative manor.

Industry Description PayPal is a member of the wide-arching financial services industry. This industry consists of a wide range of companies who specialize in the management of consumer and merchant capital. Depending on their services, the company may be classified as a bank, diversified financial service, insurance company, or in the case of PayPal, a global payment processing firm. This industry primary generates revenue through marginal returns related to debt yields and other financial management services. Although operating in the financial services sector, PayPal's services are less dependent debt yields, and largely dependent on consumers’ willingness to utilize technology in the management of their money and spending behaviors. PayPal operates in the payment processing sub-industry. Within this sub-industry, there are generally five different parties involved in the payment life cycle; (1) Issuers such as US Bank and Wells Fargo, who primarily provide banking services. (2) Card Networks such Mastercard and Visa, who issue credit cards and other payment forms, (3) Payment processors such as PayPal and Square, who primary process transactions across digital platforms, (4) Gateway Processors such as Worldpay, who operates as a third-party data process and controller between payment processers and banks, and (5) Indirect Sales channels, who market financial assets for banks and other financial intermediaries to generate revenues. Although most firms in this industry operate primarily in one step of the life cycle, there are a few companies that operate in multiple steps, such as PayPal who acts as both a payment processor and gateway processor. Industry Trends Rise of FinTech Over the past decade, the financial services industry has experienced a growing trend towards “FinTech” which is the overlap between finance and technology. Many companies operating in financial services, are now taking advantage of technological advances such as real-time data processing and payment transfers, allowing consumers and corporations to conveniently transfer and manage their funds. With these services becoming more digitized, the increase in volume of non-cash payments is becoming a significant driver in the success of companies in this industry. In 2016, the number of non-cash transactions experienced a 7.1% volume growth in

Industry Analysis

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mature markets, while developing markets experienced a volume growth of 16.5%9. As more financial services firms continue to utilize these digital service applications, we expect the industry to see consistent growth in transaction volume, revenue generation, and new investment opportunities over the next several years. Specifically, for companies who operate in the payment processing sub-industry, we expect the volume of end users and customers engaging market transactions to increase. Because this industries revenue is primarily based on a transaction fees, the volume of use by one person is equally important as gaining additional unique users. Contactless Payment Contactless payment or tap-to-pay technology will be a driver for transaction growth within the industry. By adding another checkout option, consumers do not need a card or cash when spending. This is favorable for the industry as there is no difference as far as fees on merchants. Apple pay is currently the largest supplier of this technology, and the primary competitor for PayPal in the utilization of this trend. Increasing Volume, Decreasing Value While this industry has experienced significant growth in transaction volume, it has also experienced diminishing marginal returns. From 2015 to 2016, the total number of non-cash payments experienced a compound annual growth rate (CAGR) of 7.4% with the value of those payments slowing to a growth rate of 5.8%.12

(Figure 7, FED)12

An increase in total transactions accompanied by diminishing value growth indicates the intended use of these services may be shifting more towards a P2P setting, rather than its initial use, merchant transaction processing. These P2P transactions are replacing simple cash exchanges between friends, family, and independent merchants. This shift is significant as P2P transactions are typically in smaller denominations and in the same currency, reducing foreign translation and other high-

margin fees. In order to succeed in this industry, it is important that firms develop efficient technologies and operations to handle these volume increases without increasing internal processing expenses. Porter’s 5 Forces Threat of New Entry (High and Decreasing) As the financial services industry continues to shift towards a FinTech landscape, the number of competitors in this market will continuously increase. However, the payment processing sub-industry is very competitive and primarily controlled by three firms; Visa, Mastercard, and PayPal.

Sub-Industry Market Share

(Figure 8, NetAdvantage)9

Together these three companies retain about 68% of the market share9 giving them significant advantage over existing and prospective firms looking to enter the industry. Although PayPal has only been an independent, publicly traded company for four years, the company has quickly developed a 11.1% share of the industry.9 PayPal’s strong entrance is attributable to their strong brand awareness which allows them to attract new entrants to the market. As a result, many of the smaller firms in this industry have significantly less brand recognition and are forced to primarily offer their services other firms, rather than P2P consumers. Bargaining Power of Buyers (High and Decreasing) PayPal is currently one of the leading payment processing companies in the world. In the industry, firms who are able to retain existing, high volume customers are poised to see the most success in the competitive market. However, many of these companies target the same group of customers and offer very similar pricing strategies, giving consumers many substitute services to choose from. Since the customer has the ultimate say in whom they operate with, it becomes important for these companies to offer services that continuously adapt to

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the consumer taste. With an increase in P2P transactions, PayPal continues to improve the services they offer in this area, such as Venmo. Their tailoring of payment processing into a social media platform has helped win consumer loyalty and brand recognition. The company’s recent introduction of a free Venmo card, which allows customers to obtain and swipe a physical card that draws from their Venmo accounts, is one example of the company adapting to customer tastes and allowing them to utilize their services in both a digital and tangible way. Going along with our anticipation of new firms struggling to enter the market, consumer’s bargaining power will gradually decrease. Threat of Substitution (High and Increasing) Convincing consumers to use your service is one of the greatest challenges in business and continues to be one of the most prominent objectives in the global payment processing industry. With an increase in the number of solutions provided to help customers manage their money and complete desired transactions, PayPal faces a greater threat of substitution as the number of alternative solutions developed by competitors continuously increases. For firms such as PayPal to avoid this threat, differentiation is important but tough to accomplish. PayPal strives to differentiate themselves from other competitors through an increase in the convenience of their services, as well as the acquisition of developed services to add to their product mix. Without continuous development and differentiation to service lines, companies in the global payments industry may suffer from loss or reduced rates of transaction volume, resulting in diminishing profit margins and an increased threat of new entrants to the market. Bargaining Power of Suppliers (Low) PayPal does not rely on a specific group of suppliers for their services as many of their technologies and services are developed in-house. However, in effort to expand their product mix and meet the increasing demand of consumer preferences they often engage in acquisitions to expand their service offerings more quickly. This can be seen in their past acquisitions of iZettle and Venmo, which allowed them to rapidly advance and compete in the competitive market. Competitive Rivalry (Medium) Within the global payments industry, firms provide many similar services for users to manage their funds and engage in various transactions. Although many companies offer similar services, in the case of PayPal and Mastercard they too can benefit from one another. PayPal offers a service known as Venmo. Users of this service have the option to receive a free Venmo card that grants them access to their Venmo account, as

well as their personal checking account if desired by the customer. Although the cards are being used for a PayPal service, these cards are Mastercard’s, meaning that Mastercard is the underlying card network benefitting from their use. As a result, both companies benefit off each other’s operations in this circumstance. Although many of their services compete, they do not all have identical areas of operations. This allows them to grow in many different areas without one of them always being on the losing end. Overall there is significant competition within the industry, but it is not at a detrimental level in which they can’t all be successful. Industry Regulation The Dodd-Frank act established in 2010 is a financial reform that was implemented in effort to combat poor business behavior which contributed to the market collapse of 2008. Under the reform, companies who held assets in value greater than $50 billion were to be classified as “too-big-to-fail”, and as a result were placed under greater scrutiny in the ethics of their operations. However, in 2018 under the Trump administration, there was a significant rollback in the act’s provisions, and one of those was the reclassification of a “too-large-to-fail” firms from those with assets of $50 billion to an adjusted level of $250 billion. As a result, many financial institutions will benefit from the decrease in regulatory costs and it will serve as a positive driver for companies operating in the payment processing sub-industry, as impacted firms will experience an increase in spending abilities. Key Industry Metrics Growth in Real GDP The firms in the global payments industry focus greatly on different ways to expand their business; one of those being the expansion to foreign and developing markets, such as Europe, Asia, and South America. When considering new areas of expansion, the local growth in Real GDP is an important area of focus as these businesses thrive in areas with strong and consistent domestic product, which results in favorable consumer spending behaviors. With Real GDP estimates expected to decline over the next few years, companies are likely to experience slowed growth in these areas and as a result it will become increasingly difficult to establish new business. However, for those that are well established and scalable, volatility in their operations is less likely as strong retention ratios and already established contracts will produce enough supporting cashflows to fund expansion. Yield Curves The yield curve is an important area of focus as it will affect lending and borrowing behaviors of consumers and firms.

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Although companies in PayPal’s sub-industry generally do not carry large amounts of interest-bearing debt, the effect of the yield curve on bank behaviors will have an indirect impact on these payment processors. As the yield curve flattens and begins to invert, profit margins of banks will be deflated, reducing their incentive to lend. As a result, business investment and consumer spending will continue to decrease, ultimately hurting companies in the payment processing sub-industry ability to maintain their revenue generated from a transaction volume basis. Consumer Confidence Consumer confidence is a rightful representation of future consumer spending. When consumer confidence is high, consumers are historically more active in their spending, allowing firms in the payment processing industry to realize an increase in payment transaction volume. Currently, consumer confidence sentiment is displaying a steep decline. This provides a negative outlook for present payment processors and their ability to maintain high transaction volumes. Peer Comparison PayPal vs Visa Since incorporation in 2015, PayPal has gained a significant market share within their industry. To analyze PayPal, we selected the top companies in which they fight against to capture a greater market share. As noted earlier, PayPal holds a market share of about 11.1% while Visa, the industry leader, retains about 34.2% of their competitive environment. When comparing these firms, it is apparent that PayPal has experienced much higher level of revenue growth compared to Visa. Since PayPal is a much younger company, it makes sense that they are experiencing significant levels of growth as their emphasis in expanding their services has allowed them to compete immediately with already established companies. Furthermore, PayPal only has a return on equity of 24.70% compared to Visa’s 30.40% (FactSet). PayPal’s rapid growth and acquisition of new services to offer has played a prominent role in their high levels of operating expenses. As a result, their profits are not as significant but over time we expect these expenses to decrease and margins to widen. Lastly, PayPal only has a debt-to-equity ratio of 13.27% compared to Visa’s of 80.29%20. As a new company, PayPal’s focus in growth has been in other areas that do not result in them taking on high levels of debt, which is smart as they push to grow at their greatest potential. If the economy continues decline over the next 18 months as indicated by a recent inverse of the yield curve, PayPal will be greater positioned than as Visa in comparisons to the amount of debt the two companies hold.

(Figure 9, FactSet)18

PayPal vs Mastercard When comparing PayPal and Mastercard, the two are increasingly similar in size as Mastercard has only a 22.9% market share. Similar to our previous comparison, PayPal is experiencing a much greater level of revenue growth at a rate of 28.18% compared to Mastercard’s revenue growth of 19.4%. PayPal’s emphasis on expansion of services has contributed to their large revenue growth, and will continue to play a role in capturing market share in areas of operations shared by both companies. Furthermore, Mastercard reported an industry high return on equity of about 106% compared to PayPal’s of 24.70%. At first glance, it appears that Mastercard is blowing them out of the water but it is important to note that ROE does not account for the level of debt a company has incurred. As verified by the difference in their debt to equity ratios, Mastercard has a much different capital structure than PayPal as they have a greater reliance on debt to fund acquisitions and operating activities. With a weak outlook for the economy’s future, PayPal is positioned smartly by holding significantly low levels of debt compared to Mastercard. However, Mastercard is further along in their life cycle therefore making a balanced capital structure easier to handle than for a new firm.

(Figure 10, FactSet)19

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PayPal vs Automatic Data Processing Similarly, but not the same extent, Automatic Data Processing matches up against PayPal similar to Mastercard. Automatic Data Processing is comparable in market share to PayPal as they control about 7.1% of the sub-industry’s market share. The two companies however have quite different revenue growth rates as ADP only realized a 7.64% growth in revenue. The difference in the two growth rates is largely dependent on their respective positions in the life-cycle, as PayPal is in the growth stage with ADP currently operating in a mature state. ADP does however have a better return on equity than PayPal, but by looking at the difference in their capital structures it is quite similar Mastercard. Their revenue growth is most likely the reason their ROE isn’t as great in comparison to Mastercard.

(Figure 11, FactSet)20

Peer Comparison of Beta Although PayPal and its peers differentiate from one another in the structure of their firms, their differences not have a significant impact on the overall risk of each company in this circumstance. However, this does alleviate the importance of strategy in the development of capital structure. As displayed in figure x below, the four firms share extremely similar betas. In general, these four competitors will react similar to common industry conditions, and the market as a whole. These companies can help fight volatility in the market by continuing to engage in contracts that ensure them consistent revenue streams. This way the companies can rely on specific revenue streams despite changes in spending behaviors.

(Figure 12, FactSet)17-20

Company Overview and Business Description PayPal Holdings, Inc. is a leading technology platform and digital payment processing company that enables digital and mobile payments on behalf of consumers and merchants worldwide. PayPal is committed to democratizing financial services and empowering people and businesses to join and thrive in the global economy. The company’s goal is to enable our consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform and using any device. The company’s payments platform and revenue streams come from a collection of companies all operating under PayPal management and guidance. These companies include PayPal, PayPal Credit, Braintree, Venmo, Xoom and iZettle.8 Each company generates its own revenue which is then consolidated on PayPal’s financial statements. The company does not directly state revenue breakdowns per company in their financial statements but does note lower revenue per transaction across their PayPal and Venmo product lines. Corporate Strategy PayPal’s service enables their customers to send and receive payments. The company operates a two-sided network where both merchants and consumers have PayPal accounts with stored balance functionality. Since PayPal serves as a proprietary payment method that is accepted by merchants, they are more than a connection to third-party payment networks. Their service enables the completion of payments across their Payments Platform on behalf of customers. PayPal offers customers the flexibility to use their accounts to purchase and receive payment for goods and services, as well as to transfer and withdraw funds. PayPal enables consumers to exchange funds more safely with merchants using a variety of funding sources, which may include a bank account, a PayPal account balance, a PayPal Credit account, a credit or debit card, or other stored value products such as coupons and gift cards. The companies PayPal, Venmo and Xoom products also make it safer and simpler for friends and family to transfer funds to each other. PayPal offers merchants an end-to-end payments solution that provides authorization and settlement capabilities, as well as instant access to funds. PayPal helps merchants connect with their customers and manage risk. PayPal enables consumers to engage in cross-border shopping and merchants to extend their global reach while reducing the complexity and friction involved in enabling overseas and cross-border trade.

Company Analysis

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Financial Summary In the company’s most recent annual earnings report, PayPal posted record levels of net income at $2.057B. This net income was derived from $15.45B in revenue, of which $13.709B came from transaction revenue. PayPal’s reported net operating expenses $13.257B, resulting in $2,194B of net operating income. PayPal’s largest operating expense is related to transaction expenses, which totaled 5.58B last year, comprising more than 40% of their total operating expenses. Figure 13 below depicts a breakdown of PayPal’s share of operating expenses as a percent of total operating expenses.

(Figure 13, PayPal)8

Revenue Generation PayPal earns revenues primarily by charging fees for completing payment transactions for customers and other payment-related services that are based on the volume of activity processed. Generally, PayPal does not charge consumers to fund or draw from their accounts; however, they do generate revenue from consumers on fees charged for foreign currency exchange. PayPal also earns revenue by providing other value-added services which comprise revenue earned through partnerships, PayPal Credit products, subscription fees, gateway services, and other services the company provides to merchants and consumers. PayPal’s gateway services, which include Payflow Gateway services and Braintree Gateway services, provide the technology that links a merchant’s website to its processing network and merchant account and enables merchants to accept payments online with credit or debit cards.

(Figure 14, PayPal)8

PayPal earns the majority of their revenue from transaction revenues. As PayPal continues to grow we anticipate an increase in revenue from other value-added services, but do not expect the proportion of revenue to change, as represented in our model.

(Figure 15, PayPal)8

PayPal has seen transaction revenue growth of 68%8 since transitioning to an independent, publicly traded company in 2015. As represented in our model, we anticipate revenue growth to be 61% over the next 18 months. It is important to note that the company does not earn the same revenue per transaction for all transaction types they support. Unfortunately, PayPal is not transparent in the financial reports with regard to transaction types or individual company returns for all the companies that make up their payment’s platform. PayPal does provide forward looking statements in regard to revenues as it states an anticipation of Venmo and PayPal transactions to become an increasing bigger share of their total transaction volume. This is significant as PayPal states these two transaction types yield lower margins as compared to their

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current revenue per transaction. We incorporated this outlook into our model as we grew revenue per transaction at a decreasing rate, starting at 3% and ending at 2.75% in the CV year of 2024. Growth Generation PayPal’s ability to grow revenue is affected by, among other things, consumer spending patterns, merchant and consumer adoption of digital payment methods, the expansion of multiple commerce channels, the growth of mobile devices and merchant and consumer applications on those devices, the growth of consumers globally with internet and mobile access, the pace of transition from cash and checks to digital forms of payment, relative share of the digital payments market, and their ability to innovate and bring new products and services to market that merchants and consumers value. PayPal highlights four main areas of growth generation in the 10-k statement: (1) Core business - through expanding global capabilities, customer base and scale, increasing customers' use of products and services by better addressing their everyday needs related to accessing, managing and moving money, and expanding the adoption of solutions by new merchants and consumers. (2) Expanding customer value proposition - by focusing on trust and simplicity, providing risk management and insights from their two-sided Payments Platform, removing specific technology and platform dependencies. (3) Extending through strategic partnerships - by building new strategic partnerships to provide better experiences for customers, offering greater choice and flexibility, acquiring new customers, and reinforcing their role in the ecosystem. (4) New areas of growth – seeking growth organically and through acquisitions in both existing and new international markets around the world and focusing on innovation both in the digital and physical world.8 As the world economy continues to utilize technology to exchange currency, goods, services, and information, PayPal is positioned to welcome new users to the future of payment processing. Allowing customers to access services from any device, anywhere around the world will increase business efficiency and allow more companies to utilize PayPal’s products and services to grow their operations on a global scale. Acquisitions Acquisitions have become been a key element of PayPal’s growth strategy, with more than 20 investments in or full purchases of companies since the beginning of 2017. We note the acquisitions of iZettle for $2.2 billion and Hyperwallet for $400 million completed in the fall of 2018. PayPal announced a $10 billion stock repurchase program in July 2018. This aggressive strategy will allow PayPal to continue developing new products and services and tap into new markets. We

anticipate similar capital expenditures to occur throughout PayPal’s growth stage, which is represented in our model by CapX remaining at a stable 5.5% of overall sales until their continuing value year of 2024. Product Development Along with purchasing new products and technologies, PayPal also develops new products internally. This product development is important to the company as it allows to meet more customer needs and position themselves to compete in the competitive industry. PayPal’s product development expenses increased by $118 million (12%) in 2018 and $119 million in 2017 (14%)8. Competition PayPal is now experiencing increased pressure from competition through the rise of FinTech popularity. This competition forces PayPal to compete on both price and services provided. As mentioned in the industry analysis, PayPal’s largest competitors are Visa and Mastercard, although these companies operate primary in provision of card services, their payment processing capabilities allow them to take customers and market share form PayPal. We anticipate an increased number of firms to enter the payment processing industry over the coming years, but believe PayPal’s brand recognition, established global presence, and aggressive acquisition strategy will allow them to maintain market share and recognize growing profit through transaction volume as more consumers continually transition into the cash-independent economic environment. SWOT Analysis Strengths PayPal has a high ease of use and a large global presence. The company operates in over 202 countries with more than 192 million active users8 making it the largest player in the global payments industry. Going along with this global presence, PayPal operates in 25 different currencies, allowing users to exchange and transfer money outside of their geographic regions. Additionally, PayPal is very easy to use. The company’s services are not platform of device dependent, allowing users to access services in a multitude of different ways based on their own requirements and preference. Weaknesses PayPal has a high dependency on connectivity. In order to use the company’s services, users must have internet connectivity

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which may be hard to get or expensive in some situations. Additionally, the electronic payments system has high exposure to fraud. Such systems require very strong technical support and protection procedures to prevent fraudulent activity. Opportunities An increasing number of individuals and companies are transitioning towards cashless functionality. With countries such as India pushing towards a cashless economy, PayPal has a great opportunity to expand to new markets and take advantage of increased demand for their products and services. As more companies transition to digital transfers, PayPal can increase B2C transaction volume, which is typically in higher denominations and frequency. Threats There are an increasing number of competitors entering PayPal’s market that threaten their market share and profitability. Additionally, hackers and data breaches pose a threat to the company. Many people are still uncomfortable using PayPal and other digital payment processors to manage their money. Just one occurrence of a data breach threatens PayPal’s consumer trust and the company’s ability to attract new users. Products and Markets PayPal’s goal is to enable users to manage and move their money anywhere in the world, anytime, on any platform and using any device. The company operates in 202 different countries and in 25 different currencies. PayPal’s combined payment solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom and iZettle. PayPal operates a two-sided network where both merchants and consumers have PayPal accounts with stored balance functionality. PayPal products offer customers the flexibility to use their accounts to purchase and receive payment for goods and services, as well as to transfer and withdraw funds. We enable consumers to safely exchange funds with merchants using a variety of funding sources, which include a bank account, a PayPal account balance, a PayPal Credit account, a credit or debit card, or other stored value products such as coupons and gift cards. The company’s PayPal, Venmo and Xoom products make it safer and simpler to transfer funds on a global scale. PayPal offers merchants an end-to-end payments solution that provides authorization and settlement capabilities, as well as instant access to funds. PayPal enables consumers

to engage in cross-border shopping and merchants to extend their global reach while reducing the complexity and friction involved in enabling overseas and cross-border trade. Catalysts for Growth/Change As before mentioned, the global spending environment is experiencing a transition to less cash dependency and reliance on digital transactions beyond the functionality of physical credit cards. This transition will allow PayPal to increase subscription accounts, active users, and overall transaction volumes. Cyber-security and privacy are very prominent topics across the financial and business world. In order for more customers to transition to a cashless functionality, it is essential the PayPal continues to value user privacy and security. The development of stronger security systems and data processors will drive PayPal’s growth and ability to attract and support and increased number of users. We believe overall macro-economic factors and wellbeing will have the largest impact on PayPal’s ability to grow. If the economy experiences a downturn, consumer spending and business development will decrease. Regardless of PayPal’s ability to serve customer needs, if there is minimal spending and transaction activity PayPal will be unable to profit and grow to their full potential. Key Investment Positives • Minimal interest-bearing dependency will allow PayPal to generate returns greater than other firms in their industry who are interest dependent if the yield curve remains at relatively low and flat levels. • PayPal’s products and services are experiencing increased demand as more consumers and merchants and transitioning to a cashless business environment. • Early market entrance and excess capital will allow PayPal to continuously finance growth through internal product development and acquisitions. • PayPal has a favorable financial statements that demonstrate low levels of debt, significant operating profits and revenues and demonstrating sustainable growth since their initial public offering. Key Investment Negatives • After experiencing growth greater than 25% YTD, PayPal is currently trading above both our target price and the analyst consensus, indicating future price growth is expected to slow considerably.

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• PayPal is largely impacted and dependent upon external factors out of their control, such as consumer spending and consumer confidence. Current economic indicators are pointing towards an economic slowdown which would negatively impact the company’s ability to generate profit and finance growth. • As FinTech activity continues to increase, it is likely that more firms will enter the payment processing industry. Particularly, innovative upstarts poise a strong threat to the company’s long-term growth and profitability. This will likely result in increased pricing pressure and need for product differentiation. Final Investment Recommendation Despite outstanding recent growth, and increased utilization of global payment processing, the current risks and negative sentiment associated with macro-economic and industry factors limit PayPal’s ability to grow and profit in the next 6 – 18 months. Our team foresees a period with less favorable economic conditions as compared to recent years, resulting in a modest forecast of growth and adoption of the global payment processing industry’s services as compared to recent years, rather than growing PayPal’s revenue generation to their full potential. We do believe PayPal has a great business model and sustainable revenue stream, but at this time are not a recommending an investment by the Krause Fund.

Valuation Summary After conducting an evaluation of prominent economic, industry, and company-specific factors, we have concluded that a “Hold” rating is the most appropriate for PayPal’s stock at this time. This conclusion is based on our estimated target price that ranges from $102 to $111, which we derived through the completion of several valuation models. The models we use in forecasting PayPal’s target price are the Enterprise Economic Profit, Enterprise Discounted Cash Flows, Dividend Discount Model, and Relative P/E Valuation. Our confidence in these models is the greatest for Enterprise EP & DCF, as well as the Relative P/E Valuation. The dividend discount model is not relevant in computing target price that represents the true value of PayPal as they do not pay cash dividends to shareholders, and directly state in their most recent 10-K that they do not anticipate paying any in the foreseeable future (Source?). Key Valuation Assumptions Transaction Volume Growth PayPal generates the majority of their revenue from transaction processing. This revenue stream is solely dependent on the total volume of transactions and the amount of revenue generated per

transaction. PayPal grew their total transaction volume by 27.47% in 2017, and 28.18% in 2018. From our economic analysis we concluded that there is likely to a slowdown in the economy over the next 18 months. We’ve incorporated this assumption into our forecasts by adjusting expected future growth of transaction volume to be much lower relative to prior years. In 2019 we’ve forecasted transaction volume to increase at a rate of 16% in 2019, and decreasing by a rate of 2% throughout the following 3 years. Revenue per Transaction Revenue per transaction is an additional factor in forecasting PayPal’s future transaction revenue. In calculating the average revenue generated per transaction, we divided total transaction revenue by the total volume of transactions completed in the corresponding period. Based on this method, we found that average revenue per transaction slowly decreased over the past four years. This decline was attributable to an increase in costs associated with the acquisition of multiple services in those periods, therefore reducing the margin of revenue in recent years. We do not have any indication of future acquisitions at this time, and therefore we adjusted the revenue per transaction to 3%, which is slightly above the 2.88% margin they experienced before engaging in acquisitions. Since acquisitions have been a great part in the success of PayPal, we slowed revenue per transaction to represent similar trends in historical periods since we would expect PayPal to continue acquiring companies in the long term forecast horizon. Transaction Expense PayPal’s transaction expense is their largest operating expense. These expenses arise from payments to third-party processors and partners to enable a transaction. Forecasting long-term transaction expenses is challenging as PayPal states changes in their funding mix could lead to either an increase or decrease in transaction expenses. It is additionally more challenging to forecast transaction expenses due to limited transparency regarding specific product expenses. There is more certainty in the assumption that as total transaction volume increases, total transaction expense will as well. PayPal provides insight to their historical transaction percent rate as a proportion of TPV. These expenses have experienced slight fluctuation in the past, but historically hover around an average of .95% of TPV. Because of this, we forecasted transaction expense as a consistent proportion of TPV though our CV year. It is probable that future transaction expenses will experience some volatility, but we expect the long-term average to continue to hover very near this average. CV NOPLAT Growth We generated our model with a favorable CV NOPLAT growth rate of 3.75%. This growth rate in attributable to two primary

Valuation Analysis

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sources; increased transaction activity and front-end investments. Our group assumes an increase in overall industry transaction volumes due to economic adoption of digital payments and decreased cash dependency. This trend will positively benefit PayPal and their ability to increase transaction volumes, which can be seen in our model through our forecast positive revenue growth throughout our growth stage and CV period. Another reason PayPal will be able to sustain CV NOPLAT growth of 3.75% is attributable to their front-end investment and acquisition strategy. In recent years PayPal has aggressively sought investment and acquisition of other companies operating in their industry and state plans for more acquisitions to come. This strategy will poise PayPal to sustain long-term growth and profitability as by the time they reach their continuing value stage the company will have a very large and diversified portfolio of products and services to offer potential customer, allowing the company to take advantage of developing trends and changes within the industry and economy as a whole. CV ROIC We project CV ROIC to be a very favorable 60.47%. We were able to come to this assumption through a compilation of other growth estimates such as transaction volumes and expenses, capital expenditures and acquisition expenses. This ROIC may seem overly positive, but it matches directly with historic rates and other industry competitors. The financial services industry as a whole has historically recognized favorable ROIC as firms in this industry require less investment in physical locations and human capital capitol as a majority of their operations utilize independent technologies to generate profit. Funds Receivable/Payable to Customers PayPal has two operating accounts on their balance sheet called “Funds receivable and customer accounts” and “Funds payable and amounts due to customers”. We assume these accounts drive little to no value and are therefore set to equal value in future projections. The values of these accounts typically net each other in value and primarily correspond to settling funds flowing through PayPal’s various services that happen to be unsettled at the fiscal year end. Although these two accounts appear in the operating section of PayPal’s financial statements, and do indeed relate to PayPal’s operations, we do not view them as having a significant impact on the company’s profitability and overall intrinsic value as they typically net each other, are almost always settled within 3-5 days, and do not generate significant profit or loss for the company. We implemented the assumption that they do not impact profitability or value into our model by assuming the two accounts are always equal in our future projections. This

effectively eliminates their impact on the model, while still representing their existence to external viewers of our model and report. Dividend Yield We assume PayPal will not pay dividends at any time. In PayPal’s most recent annual report, they state that they do not pay dividends and do not plan to at any time in the foreseeable future. We incorporated this into our model by assuming a 0% payout ratio through the CV year and filtering all net income into retained earnings at the end of each year. Weighted Average Cost of Capital Risk free rate We obtained our risk-free rate from the 10yr Treasury bond on the date of our model. The rate we obtained and used is 2.51%.14 this rate was further used in our WACC calculation to obtain values for cost of equity and cost of debt. Equity Risk Premium We assumed equity (market) risk premium to be 4.20%. This value represents the average implied ERP from 1960-Current and was obtained from Damodaran. We chose this value because we believe there is a lot of uncertainty forthcoming relating to macro-economic factors and overall health of the economy. We assume this value represents the implied average historic scenario, making it the safest assumption. Cost of Debt PayPal has a BBB+ credit rating9. The default spread related to this rating is 2.00%13. We calculated the cost of debt as the risk-free rate (2.51%) plus the default spread (2.00%) to arrive at a pre-tax cost of debt equal to 4.51%. We additionally assumed that long-term debt, short-term debt, and operating leases should be combined into one debt category with one standard cost. This assumption was made on the basis of PayPal rarely financing operations and growth through debt issuance, as well as having very few operating leases when compared to other firms with similar capitalization. Cost of Equity PayPal has a beta of 1.0369 . We calculated the cost of equity as the risk-free rate (2.51%) + the product of the Beta (1.036) and the market risk premium (4.20%) to arrive at a total cost of equity equal to 6.86% WACC

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PayPal is financed by 96.82% equity and 3.18% debt8. In order to calculate a weighted average cost of capital, we multiplied each proportion by its related cost to the company. After our full analysis, we concluded that PayPal has a weighted average cost of capital equal to 6.756%. Valuation Models Discounted Cash Flow (DCF) & Economic Profit (EP) The DCF model is constructed by forecasting PayPal’s free cash flows and discounting them based at the rate of the WACC. The annual free cash flows are calculated by subtracting the change in invested capital from the net operating profit, less adjusted taxes (NOPLAT). The EP profit model is constructed by investigating the annual difference between PayPal’s return on invested capital (ROIC) and their WACC. This difference is multiplied by the beginning year invested capital, and the result is the economic profit that the firm generated for the given year. For both models, we assumed that PayPal will reach their continuing-value growth rate in the year 2024. At this point, we forecast the NOPLAT to grow at an annual rate of 3.75% into perpetuity. We derived this assumption based on a conservative and diminishing estimate of our implied annual growth through 2024. Both models resulted in an intrinsic stock price of $107.99. We believe that PayPal’s operations have demonstrated sustainability, and their cash future cash flows provide an accurate metric for valuing the company. As a result, the DCF/EP profit is a reliable model for valuation. DDM PayPal does not currently pay a dividend to shareholders, and management has stated no intention to do so in the foreseeable future. Thus, we do not believe our Dividend Discount Model (DDM) represent the true value of PayPal and resulting price estimates should not be used in selecting a target price for the company. To find intrinsic value under the DDM model, we calculated our estimated EPS in our CV year (2024) and discounted the hypothetical cash flows investors would receive if the company did choose to implement a payout policy. This valuation method resulted in an intrinsic value per share of $62.60. As before mentioned, we believe this is not a true representation of PayPal’s intrinsic value, but the fact that PayPal does not pay dividends can still be a valuable consideration in the investment analysis as some investors prefer companies who payout to shareholders. Relative PE

Our relative valuation model is comprised of six comparable companies to PayPal. The model computes an intrinsic stock price based on 2018 and 2019 forward P/E ratios. This results in stock prices of $73.46 and $77.95, respectively. We don’t believe that this model provides the best estimate for intrinsic stock price as PayPal has no direct competitor due to their wide-ranging provision of services. This model does highlight the fact that PayPal generally trades at a higher multiple (40.6) as compared to their comparable firms (28.52). Rationale behind PayPal trading at this premium is the company’s large product diversification, growth opportunities, and brand recognition as compared to other comparable companies. As a result, the companies are not completely similar and should have variance in their P/E ratios. This does raise concern over PayPal being overpriced as compared to similar firms. Although this model is not as valuable for price targeting, it does provide beneficial investment information, confirming our summary that PayPal is slightly overpriced and lacks short-term profitability and growth as compared to other competitors in which they compete with. Sensitivity Analysis We created a variety of sensitivity tests to help illustrate how incremental changes in important variables drive our target price forecasts. The variables chosen for this model we deemed influential to PayPal’s overall operations and profitability. The results of the tests are analyzed below. Transaction Volume vs Transaction Expense

This test evaluates the change in PayPal’s forecasted target price as a result of incremental changes in transaction volume and transaction expense. Since these two factors are the primary drivers in PayPal’s main revenue stream, we can expect that the changes will significantly impact the price of the stocks. We can conclude from the model that incremental decreases in transaction expenses have a significantly greater impact on driving the stock price up rather than significant increases in the growth of transaction volume. Product Development vs CV ROIC

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This sensitivity analysis compares the companies funding of product development compared to their steady state return on invested capital. As shown in the analysis, as funding of product development increases there will be a decrease in the price of the expected future price. However, this in theory would not be permanent as the end goal of increasing product development is the addition of new services, therefore increasing total revenues in the future periods in which the product is actually released

and available for end users. Now as we look at the long-term growth of return on invested capital, as the CV increases we see the stock price increase, and vice versa when it appears to decrease. These two metrics share a similar importance because finding new ways to attract users to their services and then realizing an increase in returns afterwards help confirm the success in improving their services. Transaction and Loan Loss vs Pre-tax Cost of Debt

In this analysis we test how sensitive the company’s stock price is to pre-tax levels of debt and the amount of transaction and loan losses that occur. As you can see in the model, PayPal is generally not affected by the change in pre-tax cost of debt almost at all. This is because the company carries significantly low levels of debt. However, there appears to be a strong impact on the stock price as transaction and loan loss percent increases. This is because these losses are attributable to the value of payments, therefore it makes sense that even a small change in the percent would have a significant impact on the total value of losses they face as the total value of their payments currently sits around $500 billion dollars.

Risk Free Rate vs Beta

This sensitivity test evaluates changes in the risk-free rate and beta, and is significant in showing whether or not PayPal is strongly affected by the bond market. If the bond market

becomes more volatile and the risk-free rate increases about 0.50%, PayPal’s expected target price increases, but only by about $0.42. Similarly, when the risk-free rate decreases by about 0.60%, their expected stock price drops by the same amount of $0.42. As displayed in the model, you can see that incremental changes in their beta has a fairly insignificant impact on the price of the stock. PayPal currently has a beta of 1.036, and as long as the company falls no shorter than a beta of 0.7 or greater than a beta of 1.4, the stock price only changes about $1 in either direction. Their low sensitivity to changes in these metrics is attributable to their current capital structure, as they carry very low balances of debt making them less sensitive to these two metrics. CV Revenue-to-Volume Margin vs CV NOPLAT Growth The relationship between the growth in revenue per transaction and the growth rate in NOPLAT have a very similar relationship. PayPal’s revenue drives primarily on the total number of transactions and the revenue generated per transaction. As demonstrated in the sensitivity analysis above, the greater the level of steady state revenue per transaction, the greater the forecasted price will be. In theory, if PayPal can maintain their revenue per transaction above a theoretical benchmark, the profit they will receive per year is the product of that difference and the total number of transactions. Maintaining this performance will significantly drive the stock price up as you can see above when the revenue per transaction increases. Furthermore, the continue value of NOPLAT plays a prominent role in the computation of the stock’s intrinsic value. An incremental decrease of 0.50% in NOPLAT growth would significantly drive the target price down by about $6.00, and increase its price around $8.00 as a result of a 0.50% increase in NOPLAT’s steady state growth (All sensitivity data was sourced from the PayPal 10-k)8

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REFERENCES 8: “10-k Annual Report: PayPal Holdings, Inc.” Document, www.sec.gov/Archives/edgar/data/1633917/000163391719000043/pypl201810-k.htm#sE176CDC4B1C85DC38037EB758B0640B2. “Consumer Price Index for All Urban Consumers: All Items.” FRED, 10 Apr. 2019, fred.stlouisfed.org/series/CPIAUCSL. “Leading Indicators - Consumer Confidence Index (CCI) - OECD Data.” The OECD, data.oecd.org/leading/consumer-confidence-index-cci.htm. 10: “PayPal vs S&P Returns.” Google Search, Google, www.google.com/search?q=pypl&tbm=fin#scso=_mI21XJSiCs3cswWF5ZagBA2:0&smids=/m/016yss&wptab=COMPARE. “U.S. Treasury Yield Curve.” Yield Curve --GuruFocus.com, www.gurufocus.com/yield_curve.php. 2 “CME FedWatch Tool: Countdown to FOMC.” Countdown to FOMC, CME Group, www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html. 12: FED SOURCE The Federal Reserve Payments Study - 2017 Annual Supplement. (2018, January 25). Retrieved April 16, 2019, from https://www.federalreserve.gov/paymentsystems/2017-December-The-Federal-Reserve-Payments-Study.htm 9: Net Advantage Source Holt, D., & Choong, J. L. (2018, December). Industry Surveys - Data Processing & Outsourced Services. Retrieved April 14, 2019, from file:///C:/Users/ryanfunk/Downloads/DataProcessingOutsourcedServices_Dec_06_2018.pdf Mckinsey Source McKinsey & Company, Global Banking. (n.d.). Global Payments 2018: A dynamic industry continues to break new ground [Press release]. Retrieved April 16, 2019, from https://www.mckinsey.com/~/media/McKinsey/Industries/Financial Services/Our Insights/Global payments Expansive growth targeted opportunities/Global-payments-map-2018.ashx FactSet Sources: FactSet Research Systems. (n.d.). PayPal Holdings, Inc.: All Estimates. Retrieved April 15, 2019, from FactSet database. 19: FactSet Research Systems. (n.d.). MasterCard, Inc.: All Estimates. Retrieved April 15, 2019, from FactSet database.

18: FactSet Research Systems. (n.d.). Visa, Inc.: All Estimates. Retrieved April 15, 2019, from FactSet database. 20: FactSet Research Systems. (n.d.). Automatic Data Processing.: All Estimates. Retrieved April 15, 2019, from FactSet database. Yahoo Finance Sources 5: PayPal Holdings, Inc. (PYPL) (2018). Quote, key statistics. Yahoo! Finance. Retrieved from https://finance.yahoo.com/quote/PYPL/key-statistics?p=PYPL&.tsrc=fin-srch MasterCard, Inc. (MA) (2018). Quote, key statistics. Yahoo! Finance. Retrieved from https://finance.yahoo.com/quote/MA/key-statistics?p=MA Visa, Inc. (V) (2018). Quote, key statistics. Yahoo! Finance. Retrieved from https://finance.yahoo.com/quote/V/key-statistics?p=V&.tsrc=fin-srch Automatic Data Processing. (ADP) (2018). Quote, key statistics. Yahoo! Finance. Retrieved from https://finance.yahoo.com/quote/V/key-statistics?p=V&.tsrc=fin-srch 1 3“Economic Projections of Federal Reserve Board Members

and Federal Reserve Bank Presidents under Their Individual Assessments of Projected Appropriate Monetary Policy, March 2019.” Board of Governors of the Federal Reserve System, 20 Mar. 2019, www.federalreserve.gov/monetarypolicy/fomcprojtabl20190320.htm.

4“Real Gross Domestic Product.” FRED, 28 Mar. 2019, fred.stlouisfed.org/series/A191RO1Q156NBEA. 5“United States Existing Home Sales.” Trading Economics,

tradingeconomics.com/united-states/existing-home-sales.

PayPalRevenue DecompositionIn millions Fiscal Years Ending 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E CV 2024ETransaction revenues 8,128.00 9,585.00 11,501.00 13,709.00 17,445.46 20,652.35 22,702.28 24,972.52 26,706.46 27,933.93Other value added services 1,120.00 1,257.00 1,593.00 1,742.00 1,959.75 2,199.47 2,468.51 2,740.05 2,986.65 3,091.19Net revenues 9,248.00 10,842.00 13,094.00 15,451.00 19,405.21 22,851.82 25,170.79 27,712.57 29,693.12 31,025.12

Active customer accounts 179.00 197.00 227.00 267.00 305.18 349.43 391.36 430.50 464.94 492.84Number of payment transactions 4,928.00 6,129.00 7,606.00 9,871.00 12,871.78 16,874.91 21,167.89 25,613.14 29,875.17 33,567.74PMT trans per active account 27.50 31.10 33.60 36.90 42.18 48.29 54.09 59.50 64.26 68.11Value of Payments 281,764.00 354,014.00 451,265.00 578,419.00 670,966.04 764,901.29 856,689.44 942,358.38 1,027,170.64 1,078,529.17

Transaction Revenue-to-Volume $1.65 $1.56 $1.51 $1.39 $1.36 $1.22 $1.07 $0.97 $0.89 $0.83

PayPalIncome StatementIn millions Fiscal Years Ending 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024CVNet Revenues 9,248.00 10,842.00 13,094.00 15,451.00 19,405.21 22,851.82 25,170.79 27,712.57 29,693.12 31,025.12Operating Expenses: Transaction expense 2,610.00 3,346.00 4,419.00 5,581.00 6,340.63 7,228.32 8,095.72 8,905.29 9,706.76 10,192.10 Transaction and loan losses 809.00 1,088.00 1,011.00 1,274.00 1,476.13 1,682.78 1,884.72 2,073.19 2,259.78 2,372.76 Customer support and operations 1,220.00 1,267.00 1,364.00 1,482.00 1,648.31 1,833.27 2,039.00 2,267.81 2,522.29 2,805.33 Sales and marketing 985.00 969.00 1,128.00 1,313.00 1,780.47 2,096.70 2,309.48 2,542.69 2,724.41 2,846.62 Product development 947.00 834.00 953.00 1,071.00 1,559.31 1,836.26 2,022.60 2,226.85 2,386.00 2,493.03 General and administrative 560.00 1,028.00 1,155.00 1,451.00 1,637.26 1,928.06 2,123.71 2,338.17 2,505.27 2,617.65 Depreciation and amortization 608.00 724.00 805.00 776.00 881.90 1,024.05 1,186.36 1,333.89 1,478.13 1,607.36 Restructuring and other charges 48.00 0.00 132.00 309.00 171.11 201.50 221.94 244.36 261.82 273.56Total operating expense 7,787.00 9,256.00 10,967.00 13,257.00 15,495.10 17,830.94 19,883.52 21,932.23 23,844.46 25,208.43Operating income 1,461.00 1,586.00 2,127.00 2,194.00 3,910.11 5,020.88 5,287.27 5,780.34 5,848.66 5,816.69other income (expense), net 27.00 45.00 73.00 182.00 23.88 30.66 32.28 35.30 35.71 35.52Income before income taxes 1,488.00 1,631.00 2,200.00 2,373.00 3,933.99 5,051.54 5,319.55 5,815.63 5,884.37 5,852.20Income tax expense 260.00 230.00 405.00 319.00 826.14 1,060.82 1,117.11 1,221.28 1,235.72 1,228.96Net Income 1,228.00 1,401.00 1,795.00 2,057.00 3,107.85 3,990.71 4,202.45 4,594.35 4,648.66 4,623.24Basic EPS 1.16 1.49 1.74 2.62 3.37 3.55 3.88 3.92 3.90Forward PEShares outstanding 1,210.00 1,203.00 1,184.00 1,184 1,185 1,185 1,185 1,186 1,186ROE 9.52% 11.22% 13.37% 18.98% 21.87% 20.67% 20.15% 18.35% 16.61%Dividends per share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

PayPalBalance SheetIn millions Fiscal Years Ending 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024CVASSETSCurrent Assets: Cash and Equivalents 1,393.00 1,590.00 2,883.00 7,575.00 4,036.72 5,478.55 7,222.21 9,367.81 11,589.68 13,826.05 Short-term investments 2,018.00 3,385.00 2,812.00 1,534.00 1,572.50 1,611.97 1,652.43 1,693.91 1,736.43 1,780.01 Accounts receivabe, net 137.00 214.00 283.00 313.00 370.75 436.60 480.90 529.47 567.31 592.76 Loans and interest receivable, net 4,184.00 5,348.00 1,314.00 2,532.00 3,344.50 3,344.50 3,344.50 3,344.50 3,344.50 3,344.50 Loans and interest receivable, held for sale 0.00 0.00 6,398.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Funds receivable and customer accounts 12,261.00 1,436.00 18,242.00 20,062.00 20,132.10 23,707.81 26,113.64 28,750.63 30,805.37 32,187.26 Prepaid expenses 655.00 833.00 713.00 947.00 1,277.83 1,504.79 1,657.50 1,824.87 1,955.29 2,043.00 Total current assets 20,648.00 25,733.00 32,645.00 32,963.00 30,734.40 36,084.22 40,471.19 45,511.19 49,998.57 53,773.58Long-term investments 2,348.00 1,539.00 1,961.00 971.00 2,951.76 3,476.04 3,828.78 4,215.41 4,516.68 4,719.29Property, plant, and equipment, net 1,344.00 1,482.00 1,528.00 1,724.00 2,058.39 2,440.19 2,787.22 3,126.52 3,430.51 3,678.53Goodwill 4,069.00 4,059.00 4,339.00 6,284.00 6,284.00 6,284.00 6,284.00 6,284.00 6,284.00 6,284.00Intangible assets, net 358.00 211.00 168.00 825.00 454.49 561.68 633.79 712.84 774.44 815.86Other assets 114.00 79.00 133.00 565.00 579.18 593.72 608.62 623.90 639.56 655.61 Total assets 28,881.00 33,103.00 40,774.00 43,332.00 43,062.22 49,439.84 54,613.60 60,473.86 65,643.75 69,926.88LIABILITIES AND EQUITYCurrent Liabilities: Accounts payable 145.00 192.00 257.00 281.00 345.42 406.77 448.05 493.30 528.55 552.26 Notes payable 0.00 0.00 1,000.00 1,998.00 1,518.38 1,752.17 1,909.46 2,081.87 2,216.21 2,306.56 Funds payable and amounts due to customers 12,261.00 15,163.00 19,742.00 21,562.00 20,132.10 23,707.81 26,113.64 28,750.63 30,805.37 32,187.26 Accrued expenses and other current liabilities 1,179.00 1,459.00 1,781.00 2,002.00 2,638.58 3,014.40 3,320.30 3,655.59 3,916.85 4,092.55 Income taxes payable 32.00 64.00 83.00 61.00 164.71 211.50 222.72 243.49 246.37 245.02 Total current Liabilities 13,617.00 16,878.00 22,863.00 25,904.00 24,634.48 28,881.15 31,791.46 34,981.39 37,466.98 39,138.64Deffered tax and other long-term liabilities 1,505.00 1,513.00 1,917.00 2,042.00 $2,053.36 $2,313.06 $2,493.54 $2,688.99 $2,844.10 $2,951.79 Total liabilities 15,122.00 18,391.00 24,780.00 27,946.00 26,687.84 31,194.21 34,285.00 37,670.38 40,311.08 42,090.43Equity: Treasury stock 0.00 (995.00) (2,001.00) (5,511.00) (7,637.75) (9,764.50) (11,891.25) (14,018.00) (16,144.75) (18,271.50) Common Stock 13,100.00 13,579.00 14,314.00 14,939.00 14,946.28 14,953.56 14,960.84 14,968.13 14,975.41 14,982.69 Retained earnings 668.00 2,069.00 3,823.00 5,880.00 8,987.85 12,978.56 17,181.01 21,775.36 26,424.02 31,047.26 Accumulated Other Comprehensive Income (Loss) (9.00) 59.00 (142.00) 78.00 78.00 78.00 78.00 78.00 78.00 78.00 Total equity 13,759.00 14,712.00 15,994.00 15,386.00 16,374.38 18,245.63 20,328.60 22,803.49 25,332.67 27,836.45 Total liabilities and equity 28,881.00 33,103.00 40,774.00 43,332.00 43,062.22 49,439.84 54,613.60 60,473.86 65,643.75 69,926.88

Dif Between TA and TL&TSE 0.00 0.00 0.00 0.00 (0.00) 0.00 (0.00) (0.00) 0.00 (0.00)

Deferred tax liabilities (1,175.00) (1,215.00) (9.00) (109.00) (125.00) (160.00) (165.00) (170.00) (170.00) (175.00)Deferred tax assets 38.00 21.00 95.00 224.00 240.00 245.00 253.00 261.00 255.00 248.00Total Deferred tax (1,213.00) (1,236.00) (104.00) (333.00) (365.00) (405.00) (418.00) (431.00) (425.00) (423.00)

Depreciation 515 574 649 627 733 875 1037 1185 1329 145842.71% 43.79% 41.03% 42.51% 42.51% 42.51% 42.51% 42.51% 42.51%

CapEx (722.00) (669.00) (667.00) (823.00) (1,067.29) (1,256.85) (1,384.39) (1,524.19) (1,633.12) (1,706.38)-7.81% -6.17% -5.09% -5.33% -5.50% -5.50% -5.50% -5.50% -5.50% -5.50%

Amortization 93 150 156 149 149 149 149 149 149 149

Accrued Liab as % of SG&A 210.54% 141.93% 154.20% 137.97% 161.16% 161.16% 161.16% 161.16% 161.16% 161.16%Inc Tax Pay Proportion 12.31% 27.83% 20.49% 19.12% 19.94% 19.94% 19.94% 19.94% 19.94% 19.94%CAGR Income Tax Exp -11.54% 76.09% -21.23% 14.44% 14.44% 14.44% 14.44% 14.44% 14.44%

Avg Buy Back of Treasury Stck (2,126.75)Notes Pay% of CA minus Cash 0.00% 0.00% 3.71% 8.38%

PayPalCash Flow StatementIn millions Fiscal Years Ending 2015 2016 2017 2018Cash FlowCash flows from operating activitiesNet income 1,228.00 1,401.00 1,795.00 2,057.00Adjustments: Transaction and loan losses 809.00 1,088.00 1,011.00 1,274.00 Depreciation and amortization 608.00 724.00 805.00 776.00 Stock-based compensation 346.00 438.00 733.00 853.00 Deferred income taxes 127.00 52.00 (1,299.00) (171.00) Excess tax benefits from stock-based compensation (26.00) (40.00) 0.00 0.00 Cost basis adjustments to loans and interest receivable held f 0.00 0.00 92.00 244.00 Other (40.00) (24.00) (25.00) (172.00)Changes in assets and liabilities: Accounts receivable 99.00 (77.00) 12.00 (59.00) Changes in loans and interest receivable held for sale, net 14.00 24.00 (1,308.00) 1,407.00 Transaction loss allowance for cash losses, net (493.00) (643.00) (817.00) (1,046.00) Other current assets and non-current assets (384.00) (145.00) (188.00) (112.00) Accounts payable (205.00) 11.00 62.00 26.00 Income taxes payable 40.00 69.00 19.00 (44.00) Other current liabilities and non-current liabilities 423.00 280.00 1,639.00 450.00Net cash provided by operating activities 2,546.00 3,158.00 2,531.00 5,483.00Cash flows from investing activities: Purchases of property and equipment (722.00) (669.00) (667.00) (823.00) Proceeds from sales of property and equipment 26.00 0.00 0.00 3.00 Changes in principal loans receivable, net (819.00) (1,523.00) (920.00) 3,121.00 Purchases of investments (7,542.00) (21,041.00) (19,418.00) (22,381.00) Maturities and sales of investments 3,318.00 18,429.00 18,448.00 21,898.00 Acquisitions, net of cash and restricted cash acquired (1,225.00) (19.00) (323.00) (2,124.00) Funds receivable 575.00 (1,081.00) (1,605.00) 1,146.00Net cash provided by (used in) investing activities (6,389.00) (5,904.00) (4,485.00) 840.00Cash flows from financing activities: Proceeds from issuance of common stock 75.00 109.00 144.00 144.00 Purchases of treasury stock 0.00 (995.00) (1,006.00) (3,520.00) Excess tax benefits from stock-based compensation 26.00 40.00 0.00 0.00 Contribution from Ebay 3,858.00 0.00 0.00 0.00 Tax withholdings related to net share settlements of restricte (18.00) (118.00) (166.00) (419.00) Borrowings under financing arrangements 0.00 0.00 1,800.00 2,075.00 Repayments under financing arrangements (862.00) (21.00) (980.00) (1,115.00) Funds payable and amounts due to customers 1,649.00 3,023.00 4,292.00 1,573.00Funds recievable and customer accounts (1,649.00) 0.00 0.00 0.00Net cash (used in) provided by financing activities 3,079.00 2,038.00 4,084.00 (1,262.00) Effect of exchange rate changes on cash, cash equivalents, an (44.00) 0.00 36.00 (113.00)Net change in cash, cash equivalents, and restricted cash (808.00) (708.00) 2,166.00 4,948.00Cash, cash equivalents, and restricted cash at beginning of peri 2,201.00 6,827.00 6,119.00 8,285.00Cash, cash equivalents, and restricted cash at end of period 1,393.00 6,119.00 8,285.00 13,233.00

0Cash Flow Statement

Fiscal Years Ending 2019E 2020E 2021E 2022E 2023E 2024CVCash FlowCash flows from operating activitiesNet income 3,107.85 3,990.71 4,202.45 4,594.35 4,648.66 4,623.24Adjustments:Depreciation and Amortization 881.90 1,024.05 1,186.36 1,333.89 1,478.13 1,607.36 Stock-based compensation, net. 916.89 1,079.74 1,189.31 1,309.41 1,402.99 1,543.29 Deferred income taxes 32.00 40.00 13.00 13.00 (6.00) (2.00) Other 14.18 14.54 14.90 15.28 15.66 16.05Changes in assets and liabilities: Accounts receivable (870.25) (65.85) (44.31) (48.56) (37.84) (25.45) Accounts payable (415.20) 295.14 198.58 217.65 169.60 114.06Customer Funding, net 1,500.00 0.00 0.00 0.00 0.00 0.00 Income taxes payable 103.71 46.79 11.22 20.77 2.88 (1.35) Other current assets and non-current assets 1,980.76 524.27 352.74 386.63 301.26 202.61

Net cash provided by operating activities 7,251.85 6,949.39 7,124.26 7,842.42 7,975.34 8,077.82Cash flows from investing activities: Capital Expenditures, Net of Depreciation (334.39) (381.80) (347.03) (339.30) (303.99) (248.02) Short Term Investments (38.50) (39.47) (40.46) (41.48) (42.52) (43.58) Long Term Investments (1,980.76) (524.27) (352.74) (386.63) (301.26) (202.61) Acquisitions, net of cash and restricted cash acquired 0.00 0.00 0.00 0.00 0.00 0.00

Net cash provided by (used in) investing activities (2,353.66) (945.54) (740.24) (767.41) (647.77) (712.55)Cash flows from financing activities: Proceeds from issuance of common stock 7.28 7.28 7.28 7.28 7.28 7.28 Purchases of treasury stock (2,126.75) (2,126.75) (2,126.75) (2,126.75) (2,126.75) (2,126.75) Proceeds and Repayments from Issuance of long-term debt 636.58 375.82 305.90 335.29 261.26 175.71Net cash (used in) provided by financing activities (1,482.89) (1,743.65) (1,813.57) (1,784.18) (1,858.21) (1,943.76) Effect of exchange rate changes on cash, cash equivalents, and restricted cashNet change in cash, cash equivalents, and restricted cash 3,415.31 4,260.21 4,570.45 5,290.83 5,469.35 5,421.51Cash, cash equivalents, and restricted cash at beginning of peri 7,575.00 4,036.72 5,478.55 7,222.21 9,367.81 11,589.68Cash, cash equivalents, and restricted cash at end of period 10,990.31 8,296.92 10,049.00 12,513.04 14,837.16 17,011.19

PayPalCommon Size Income Statement% of SalesFiscal Years Ending 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024CVNet Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Operating Expenses: Transaction expense 28.22% 30.86% 33.75% 36.12% 32.67% 31.63% 32.16% 32.13% 32.69% 32.85% transaction and loan losses 8.75% 10.04% 7.72% 8.25% 7.61% 7.36% 7.49% 7.48% 7.61% 7.65% Customer support and operations 13.19% 11.69% 10.42% 9.59% 11.22% 11.22% 11.22% 11.22% 11.22% 11.22% Sales and marketing 10.65% 8.94% 8.61% 8.50% 9.18% 9.18% 9.18% 9.18% 9.18% 9.18% Product development 10.24% 7.69% 7.28% 6.93% 8.04% 8.04% 8.04% 8.04% 8.04% 8.04% General and administrative 6.06% 9.48% 8.82% 9.39% 8.44% 8.44% 8.44% 8.44% 8.44% 8.44% Depreciation and amortization 6.57% 6.68% 6.15% 5.02% 4.54% 4.48% 4.71% 4.81% 4.98% 5.18% Restructuring and other charges 0.52% 0.00% 1.01% 2.00% 0.88% 0.88% 0.88% 0.88% 0.88% 0.88%Total operating expense 84.20% 85.37% 83.76% 85.80% 82.58% 81.23% 82.12% 82.18% 83.03% 83.43%Operating income 15.80% 14.63% 16.24% 14.20% 20.15% 21.97% 21.01% 20.86% 19.70% 18.75%other income (expense), net 0.29% 0.42% 0.56% 1.18% 0.61% 0.61% 0.61% 0.61% 0.61% 0.61%Income before income taxes 16.09% 15.04% 16.80% 15.36% 20.76% 22.58% 21.62% 21.47% 20.31% 19.36%Income tax expense 2.81% 2.12% 3.09% 2.06% 2.52% 2.45% 2.53% 2.39% 2.47% 2.46%Net Income 13.28% 12.92% 13.71% 13.31% 18.24% 20.13% 19.08% 19.08% 17.83% 16.90%

PayPalCommon Size Balance Sheet

Fiscal Years Ending 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024CV% of SalesASSETSCurrent Assets: Cash and Equivalents 15.06% 14.67% 22.02% 49.03% 20.80% 23.97% 28.69% 33.80% 39.03% 44.56% Short-term investments 21.82% 31.22% 21.48% 9.93% 8.10% 7.05% 6.56% 6.11% 5.85% 5.74% Accounts receivabe, net 1.48% 1.97% 2.16% 2.03% 1.91% 1.91% 1.91% 1.91% 1.91% 1.91% Loans and interest receivable, net 45.24% 49.33% 10.04% 16.39% 17.24% 14.64% 13.29% 12.07% 11.26% 10.78% Loans and interest receivable, held for sale 0.00% 0.00% 48.86% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Funds receivable and customer accounts 132.58% 13.24% 139.32% 129.84% 103.75% 103.75% 103.75% 103.75% 103.75% 103.75% Prepaid expenses 7.08% 7.68% 5.45% 6.13% 6.58% 6.58% 6.58% 6.58% 6.58% 6.58% Total current assets 223.27% 237.35% 249.31% 213.34% 158.38% 157.91% 160.79% 164.23% 168.38% 173.32%Long-term investments 25.39% 14.19% 14.98% 6.28% 15.21% 15.21% 15.21% 15.21% 15.21% 15.21%Property, plant, and equipment, net 14.53% 13.67% 11.67% 11.16% 10.61% 10.68% 11.07% 11.28% 11.55% 11.86%Goodwill 44.00% 37.44% 33.14% 40.67% 32.38% 27.50% 24.97% 22.68% 21.16% 20.25%Intangible assets, net 3.87% 1.95% 1.28% 5.34% 3.11% 3.11% 3.11% 3.11% 3.11% 3.11%Other assets 1.23% 0.73% 1.02% 3.66% 2.98% 2.60% 2.42% 2.25% 2.15% 2.11% Total assets 312.29% 305.32% 311.39% 280.45% 221.91% 216.35% 216.97% 218.22% 221.07% 225.39%LIABILITIES AND EQUITYCurrent Liabilities: Accounts payable 1.57% 1.77% 1.96% 1.82% 1.78% 1.78% 1.78% 1.78% 1.78% 1.78% Notes payable 0.00% 0.00% 7.64% 12.93% 10.28% 10.28% 10.28% 10.28% 10.28% 10.28% Funds payable and amounts due to customers 132.58% 139.85% 150.77% 139.55% 140.69% 140.69% 140.69% 140.69% 140.69% 140.69% Accrued expenses and other current liabilities 12.75% 13.46% 13.60% 12.96% 13.60% 13.19% 13.19% 13.19% 13.19% 13.19% Income taxes payable 0.35% 0.59% 0.63% 0.39% 0.85% 0.93% 0.88% 0.88% 0.83% 0.79% Total current Liabilities 147.24% 155.67% 174.61% 167.65% 126.95% 126.38% 126.30% 126.23% 126.18% 126.15%Deffered tax and other long-term liabilities 16.27% 13.95% 14.64% 13.22% 10.58% 10.12% 9.91% 9.70% 9.58% 9.51% Total liabilities 163.52% 169.63% 189.25% 180.87% 137.53% 136.51% 136.21% 135.93% 135.76% 135.67%Equity:

Treasury stock 0.00% -9.18% -15.28% -35.67% -39.36% -42.73% -47.24% -50.58% -54.37% -58.89%Common Stock 141.65% 125.24% 109.32% 96.69% 77.02% 65.44% 59.44% 54.01% 50.43% 48.29% Retained earnings 7.22% 19.08% 29.20% 38.06% 46.32% 56.79% 68.26% 78.58% 88.99% 100.07% Accumulated depreciation -0.10% 0.54% -1.08% 0.50% 0.40% 0.34% 0.31% 0.28% 0.26% 0.25% Total equity 148.78% 135.69% 122.15% 99.58% 84.38% 79.84% 80.76% 82.29% 85.31% 89.72% Total liabilities and equity 312.29% 305.32% 311.39% 280.45% 221.91% 216.35% 216.97% 218.22% 221.07% 225.39%

% of AssetsASSETSCurrent Assets: Cash and Equivalents 4.82% 4.80% 7.07% 17.48% 9.37% 11.08% 13.22% 15.49% 17.66% 19.77% Short-term investments 6.99% 10.23% 6.90% 3.54% 3.65% 3.74% 3.84% 3.93% 4.03% 4.13% Accounts receivabe, net 0.47% 0.65% 0.69% 0.72% 0.86% 1.01% 1.12% 1.23% 1.32% 1.38% Loans and interest receivable, net 14.49% 16.16% 3.22% 5.84% 7.77% 7.77% 7.77% 7.77% 7.77% 7.77% Loans and interest receivable, held for sale 0.00% 0.00% 15.69% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Funds receivable and customer accounts 42.45% 4.34% 44.74% 46.30% 46.75% 55.05% 60.64% 66.77% 71.54% 74.75% Prepaid expenses 2.27% 2.52% 1.75% 2.19% 2.97% 3.49% 3.85% 4.24% 4.54% 4.74% Total current assets 71.49% 77.74% 80.06% 76.07% 71.37% 71.37% 71.37% 71.37% 71.37% 71.37%Long-term investments 8.13% 4.65% 4.81% 2.24% 6.85% 8.07% 8.89% 9.79% 10.49% 10.96%Property, plant, and equipment, net 4.65% 4.48% 3.75% 3.98% 4.78% 5.67% 6.47% 7.26% 7.97% 8.54%Goodwill 14.09% 12.26% 10.64% 14.50% 14.59% 14.59% 14.59% 14.59% 14.59% 14.59%Intangible assets, net 1.24% 0.64% 0.41% 1.90% 1.06% 1.30% 1.47% 1.66% 1.80% 1.89%Other assets 0.39% 0.24% 0.33% 1.30% 1.34% 1.38% 1.41% 1.45% 1.49% 1.52% Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 184.54% 126.82% 140.43% 152.44% 162.39%LIABILITIES AND EQUITYCurrent Liabilities: Accounts payable 0.50% 0.58% 0.63% 0.65% 0.80% 0.94% 1.04% 1.15% 1.23% 1.28% Notes payable 0.00% 0.00% 2.45% 4.61% 3.53% 9.60% 9.39% 9.13% 8.75% 8.29% Funds payable and amounts due to customers 42.45% 45.81% 48.42% 49.76% 46.75% 47.95% 47.82% 47.54% 46.93% 46.03% Accrued expenses and other current liabilities 4.08% 4.41% 4.37% 4.62% 6.13% 7.00% 7.71% 8.49% 9.10% 9.50% Income taxes payable 0.11% 0.19% 0.20% 0.14% 0.38% 0.49% 0.52% 0.57% 0.57% 0.57% Total current Liabilities 47.15% 50.99% 56.07% 59.78% 57.21% 67.07% 73.83% 81.23% 87.01% 90.89%Deffered tax and other long-term liabilities 5.21% 4.57% 4.70% 4.71% 4.77% 5.37% 5.79% 6.24% 6.60% 6.85% Total liabilities 52.36% 55.56% 60.77% 64.49% 61.98% 72.44% 79.62% 87.48% 93.61% 97.74%Equity: Common stock Treasury stock 0.00% -3.01% -4.91% -12.72% -17.74% -22.68% -27.61% -32.55% -37.49% -42.43% Additional paid-in-capital 45.36% 41.02% 35.11% 34.48% 34.71% 34.73% 34.74% 34.76% 34.78% 34.79% Retained earnings 2.31% 6.25% 9.38% 13.57% 20.87% 30.14% 39.90% 50.57% 61.36% 72.10% Accumulated depreciation -0.03% 0.18% -0.35% 0.18% 0.18% 0.18% 0.18% 0.18% 0.18% 0.18% Total equity 47.64% 44.44% 39.23% 35.51% 38.02% 42.37% 47.21% 52.95% 58.83% 64.64% Total liabilities and equity 100.00% 100.00% 100.00% 100.00% 100.00% 100% 100% 100% 100% 100%

PayPalValue Driver Estimation

Fiscal Years Ending 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024CVNOPLAT:Revenue 9,248 10,842 13,094 15,451 19,405 22,852 25,171 27,713 29,693 31,025Operating expenses (7,787) (9,256) (10,967) (13,257) (15,495) (17,831) (19,884) (21,932) (23,844) (25,208)Implied Interest on PV Operating Leases 17 27 27 33 29 35 40 45 49 53EBITA 1,478 1,613 2,154 2,227 3,940 5,056 5,327 5,825 5,898 5,869Less: Income Taxes (unadjusted)Income Tax Expense 260 230 405 319 826 1,061 1,117 1,221 1,236 1,229 + Tax Shield on Interest Expense 1 1 1 16 19 22 24 25 27 28 - Tax Shield on Interest Income (12) (18) (35) (41) (47) (54) (62) (71) (82) (94) + Tax Shield on Amortized Goodwill 33 53 55 31 31 31 31 31 31 31 + Tax Shield PV Op Lease 6 9 10 7 6 7 8 9 10 11 + Tax Shield on Restructuring 17 0 46 65 36 71 78 86 55 57Less: Total Tax Adjustment 303 275 482 398 872 1,138 1,196 1,302 1,278 1,263Plus: Change in Deferred Taxes 0 (23) 1,132 (229) (32) (40) (13) (13) 6 2NOPLAT: 1,174 1,315 2,805 1,600 3,035 3,878 4,118 4,510 4,626 4,608

Invested Capital:Operating Current Assets:Normal Cash 2,035 2,385 2,881 3,399 4,269 5,027 5,538 6,097 6,532 6,826Accounts Receivable 137 214 283 313 371 437 481 529 567 593Other Receivables 16,445 6,784 19,556 22,594 23,477 27,052 29,458 32,095 34,150 35,532Prepaid Expenses 655 833 713 947 1,278 1,505 1,657 1,825 1,955 2,043Total Operating Current Assets 19,272 10,216 23,433 27,253 29,394 34,021 37,134 40,546 43,205 44,993Less Non-interest Bearing CL:Accounts Payable 145 192 257 281 345 407 448 493 529 552Funds payable and amounts due to customers 12,261 15,163 19,742 21,562 23,477 27,052 29,458 32,095 34,150 35,532Income Tax Payable 32 64 83 61 165 212 223 243 246 245Accrued Expenses and other current liabilities 1,179 1,459 1,781 2,002 2,639 3,014 3,320 3,656 3,917 4,093Total Non-interest Bearing CL 13,617 16,878 21,863 23,906 26,625 30,685 33,449 36,488 38,842 40,422Plus Operating Non-current assetsNet PP&E 1,344 1,482 1,528 1,724 2,058 2,440 2,787 3,127 3,431 3,679Intangible assets, net 358 211 168 825 454 562 634 713 774 816Other Oper. Assets 76 58 38 341 339 349 356 363 385 408PV Operating leases 276 448 455 546 652 774 884 991 1,087 1,166Total Operating Non-curent assets 2,054 2,199 2,189 3,436 3,505 4,124 4,660 5,193 5,677 6,068Less Total Non-current liabilities 292 277 1,813 1,709 1,688 1,908 2,076 2,258 2,419 2,529Invested Capital: 7,416 (4,740) 1,945 5,075 4,585 5,552 6,270 6,994 7,621 8,111

ROIC:NOPLAT 1,315.17 2,804.75 1,600.13 3,035.21 3,877.55 4,117.76 4,510.04 4,626.08 4,608.42Beginning Invested Capital 7,416.42 (4,740.21) 1,945.49 5,074.71 4,585.20 5,552.15 6,269.52 6,994.08 7,621.16ROIC: -59.17% 82.25% 59.81% 84.57% 74.17% 71.94% 66.14% 60.47%

FCF:NOPLAT 1,315 2,805 1,600 3,035.21 3,877.55 4,117.76 4,510.04 4,626.08 4,608.42Change in IC (12,157) 6,686 3,129 (489.51) 966.95 717.37 724.56 627.08 489.56FCF: 13,472 (3,881) (1,529) 3,524.72 2,910.60 3,400.39 3,785.49 3,999.00 4,118.86

EP:NOPLAT 1,315 2,805 1,600 3,035.21 3,877.55 4,117.76 4,510.04 4,626.08 4,608.42Beginning Invested Capital 7,416 (4,740) 1,945 5,074.71 4,585.20 5,552.15 6,269.52 6,994.08 7,621.16WACC 6.76% 6.76% 6.76% 6.76% 6.76% 6.76% 6.76% 6.76% 6.76%EP: 814 3,125 1,469 2,692.34 3,567.76 3,742.63 4,086.45 4,153.54 4,093.50

PayPalKey Management Ratios

Fiscal Years Ending 2016 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024EFormula

Liquidity RatiosCurrent Ratio (CA/CL) (Current Assets / Current Liabilites) 1.52$ 1.52$ 1.43$ 1.27$ 1.25$ 1.25$ 1.27$ 1.30$ 1.33$ 1.37$ Quick Ratio (Cash + ST Investments + Recievables) / (Current Liabilities) 0.57$ 0.62$ 0.32$ 0.46$ 0.38$ 0.38$ 0.40$ 0.43$ 0.46$ 0.50$ Cash Ratio (Cash / Current Liabilities) 0.10$ 0.09$ 0.13$ 0.29$ 0.16$ 0.19$ 0.23$ 0.27$ 0.31$ 0.35$

Activity or Asset-Management RatiosReceivables Turnover (Total Revenue / Beginning Recievables) 2.51 2.35 9.68 6.82 6.15 6.66 7.24 7.66 7.93Days' Receivables (365 / Receivables Turnover) 145.47 155.04 37.73 53.51 59.34 54.83 50.38 47.62 46.02

Financial Leverage RatiosDebt Ratio (Total Debt / Total Assets) 52.36% 55.56% 60.77% 64.49% 61.98% 63.10% 62.78% 62.29% 61.41% 60.19%Debt-to-Equity Ratio (Total Debt / Total Equity) 109.91% 125.01% 154.93% 181.63% 162.99% 170.97% 168.65% 165.20% 159.13% 151.21%

Profitability RatiosGross Margin (Total Revenue - COGS) / (Total Revenue) 26.97% 23.57% 25.87% 24.70% 30.21% 32.03% 31.06% 30.92% 29.75% 28.81%ROA (Net Income / Average Total Assets) 4.52% 4.86% 4.89% 7.19% 8.63% 8.08% 7.98% 7.37% 6.82%Profit Margin (Net Income / Total Revenue) 13.28% 12.92% 13.71% 13.31% 16.02% 17.46% 16.70% 16.58% 15.66% 14.90%

Payout Policy RatiosDividend Payout Ratio (Dividends / EPS) (No Dividends Paid)Retention Ratio (1 - Dividend Payout Ratio) (No Dividends Paid)

PayPalWeighted Average Cost of Capital (WACC) Estimation

Cost of EquityRisk-free rate 2.51%Market Risk Premium 4.20%Beta 1.036Cost of Equity 6.86%

Cost of DebtRisk-free rate 2.51%BBB+ Default Spread 2.00%Pre-tax 4.51%Tax rate 21.00%After-tax Cost of Debt 3.56%

Market Value of EquityShare Price $106.46Shares Outstanding 1,173Market Value of Equity $124,878

Market Value of DebtSTD & Current Portion LTD 2,002.00LTD 2,042PV Op. Leases 94Market Value of Debt $4,138

Market Weights% Equity 96.79%% Debt 3.21%

WACC 6.76%

PayPalDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 3.75% CV ROIC 60.47% WACC 6.76% Cost of Equity 6.86%

Fiscal Years Ending 2019E 2020E 2021E 2022E 2023E 2024E

DCF Model

NOPLAT 3,035.21 3,877.55 4,117.76 4,510.04 4,626.08 4,608.42CapEx (∆ IC) (489.51) 966.95 717.37 724.56 627.08 489.56Free Cash Flow (FCF) 3,524.72 2,910.60 3,400.39 3,785.49 3,999.00 4,118.86Continuing Value 143,780.28

Cash Flow to Discount 3,524.72 2,910.60 3,400.39 3,785.49 3,999.00 143780Discount Periods 1 2 3 4 5 5PV of Cash Flows 3,301.65 2,553.85 2,794.78 2,914.38 2,883.91 103,688.23

Value of Operating Assets 118,136.79Add: Excess Cash 4,175.78

Add: Marketable Securities 1,534.00Add: Other non-operating assets 579.18Add: Long Term Investments 971.00Less: Debt (4,040.00)Less: PV of Operating Leases (546.49)Less: ESOP (97.07)Value of Equity 120,713.20Shares Outstanding 1,173.00Intrinsic Value (per share) 102.91Model Date 4/10/19Next FYE 12/31/19Last FYE 12/31/18Days in FY 365Days to FYE 265Elapsed Fraction 0.7260Adjusted Target Price $107.99

EP ModelNOPLAT 3,035.21 3,877.55 4,117.76 4,510.04 4,626.08 4,608.42Beginning Invested Capital 5,074.71 4,585.20 5,552.15 6,269.52 6,994.08 7,621.16ROIC 0.60 0.85 0.74 0.72 0.66 0.60WACC 6.76% 6.76% 6.76% 6.76% 6.76% 6.76%Economic Profit 2,692.34 3,567.76 3,742.63 4,086.45 4,153.54 4,093.50Continuing Value ##########

Cash Flow to Discount 2,692.34 3,567.76 3,742.63 4,086.45 4,153.54 136,159.12Discount Periods 1 2 3 4 5 5PV of Cash Flows 2,521.95 3,130.45 3,076.07 3,146.08 2,995.35 98,192.18

Value of Economic Profit 113062Beginning Invested Capital (T=0) 5075Value of Operating Assets 118137Add: Excess Cash 4176Add: Marketable Securities 1534Add: Other non-operating assets 579Add: Long Term Investments 971Less: Debt -4040Less: PV of Operating Leases -546Less: ESOP -97Value of Equity 120713Shares Outstanding 1173Intrinsic Value (per share) 102.91

Model Date 4/10/19Next FYE 12/31/19Last FYE 12/31/18Days in FY 365Days to FYE 265Elapsed Fraction 0.7260Adjusted Target Price 107.99$

PayPalDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2018 2019E 2020E 2021E 2022E 2023E 2024CV

EPS 1.74$ 2.62$ 3.37$ 3.55$ 3.88$ 3.92$ 3.90$

Key AssumptionsCV growth 3.50%CV ROE 16.61%Cost of Equity 6.86%

Future Cash FlowsDividends Per Share $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Hypothetical Dividend (CV Year) $3.08Future Cash Flows $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $91.54Discount Periods 1 2 3 4 5 6 6Discounted Cash Flows 0 0 0 0 0 0 $61.47

Intrinsic Value $61.47

Model Date 4/10/19Next FYE 12/31/19Last FYE 12/31/18Days in FY 365.00Days to FYE 100Elapsed Fraction 0.274Adjusted Target Price $62.60

107.99$ 10.00% 12.00% 14.00% 16.00% 18.00% 20.00% 22.00%0.65% $160.93 $164.05 $167.18 $170.30 $173.43 $176.55 $179.680.75% $141.23 $144.00 $146.76 $149.53 $152.30 $155.06 $157.830.85% $121.53 $123.94 $126.35 $128.76 $131.17 $133.58 $135.990.95% $101.84 $103.89 $105.94 $107.99 $110.04 $112.09 $114.141.05% $82.14 $83.83 $85.52 $87.22 $88.91 $90.60 $92.291.15% $62.44 $63.78 $65.11 $66.44 $67.78 $69.11 $70.451.25% $42.74 $43.72 $44.70 $45.67 $46.65 $47.62 $48.60

107.99$ 6.54% 7.04% 7.54% 8.04% 8.54% 9.04% 9.54%30.47% $109.95 $107.28 $104.62 $101.95 $99.28 $96.62 $93.9540.47% $113.19 $110.45 $107.70 $104.96 $102.21 $99.47 $96.7250.47% $115.15 $112.36 $109.57 $106.77 $103.98 $101.18 $98.3960.47% $116.47 $113.64 $110.81 $107.99 $105.16 $102.34 $99.5170.47% $117.41 $114.56 $111.71 $108.86 $106.01 $103.16 $100.3180.47% $118.11 $115.25 $112.38 $109.51 $106.65 $103.78 $100.9190.47% $118.66 $115.78 $112.90 $110.02 $107.14 $104.26 $101.38

107.99$ 0.13% 0.16% 0.19% 0.22% 0.25% 0.28% 0.31%3.76% $126.62 $120.39 $114.15 $107.92 $101.69 $95.46 $89.234.01% $126.64 $120.41 $114.18 $107.94 $101.71 $95.48 $89.254.26% $126.66 $120.43 $114.20 $107.97 $101.74 $95.50 $89.274.51% $126.68 $120.45 $114.22 $107.99 $101.76 $95.52 $89.294.76% $126.70 $120.47 $114.24 $108.01 $101.78 $95.55 $89.315.01% $126.72 $120.49 $114.26 $108.03 $101.80 $95.57 $89.335.26% $126.74 $120.51 $114.28 $108.05 $101.82 $95.59 $89.35

107.99$ 1.20% 2.20% 3.20% 4.20% 5.20% 6.20% 7.20%3.00% $88.53 $89.17 $89.81 $90.45 $91.09 $91.72 $92.353.25% $93.44 $94.11 $94.79 $95.46 $96.13 $96.80 $97.473.50% $99.10 $99.81 $100.53 $101.24 $101.96 $102.67 $103.373.75% $105.70 $106.46 $107.23 $107.99 $108.75 $109.50 $110.264.00% $113.50 $114.32 $115.14 $115.95 $116.77 $117.58 $118.394.25% $122.85 $123.74 $124.63 $125.51 $126.39 $127.27 $128.154.50% $134.28 $135.25 $136.22 $137.19 $138.15 $139.11 $140.07

107.99$ 6.01% 6.26% 6.51% 6.76% 7.01% 7.26% 7.51%0.736 $142.32 $128.23 $116.69 $107.06 $98.94 $91.96 $85.920.836 $142.73 $128.60 $117.03 $107.37 $99.22 $92.23 $86.160.936 $143.14 $128.97 $117.37 $107.68 $99.51 $92.49 $86.411.036 $143.55 $129.34 $117.70 $107.99 $99.79 $92.76 $86.661.136 $143.96 $129.71 $118.04 $108.30 $100.08 $93.02 $86.911.236 $144.37 $130.07 $118.37 $108.60 $100.36 $93.29 $87.151.336 $144.78 $130.44 $118.71 $108.91 $100.65 $93.55 $87.40

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Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 1Average Time to Maturity (years): 4.45Expected Annual Number of Options Exercised: 0.266

Current Average Strike Price: 27.39$ Cost of Equity: 6.86%Current Stock Price: $106.46

2018E 2019E 2020E 2021E 2022E 2023EIncrease in Shares Outstanding: 0 0 0 0 0 0Average Strike Price: 27.39$ 27.39$ 27.39$ 27.39$ 27.39$ 27.39$ Increase in Common Stock Account: 7 7 7 7 7 7

Change in Treasury Stock -7 -7 -7 -7 -7 -7Expected Price of Repurchased Shares: 106.46$ 113.76$ 121.57$ 129.91$ 138.82$ 148.35$ Number of Shares Repurchased: (0) (0) (0) (0) (0) (0)

Shares Outstanding (beginning of the year) 1,184 1,184 1,185 1,185 1,185 1,186Plus: Shares Issued Through ESOP 0 0 0 0 0 0Less: Shares Repurchased in Treasury (0) (0) (0) (0) (0) (0) Shares Outstanding (end of the year) 1,184 1,185 1,185 1,185 1,186 1,186

Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Operating Operating Operating OperatingFiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases2019 124 2018 119 2017 102 2016 552020 111 2019 112 2018 106 2017 512021 96 2020 82 2019 93 2018 492022 81 2021 62 2020 63 2019 382023 63 2022 50 2021 47 2020 32Thereafter 189 Thereafter 130 Thereafter 141 Thereafter 129Total Minimum Payments 664 Total Minimum Payments 555 Total Minimum Payments 552 Total Minimum Payments 354Less: Interest 118 Less: Interest 100 Less: Interest 104 Less: Interest 78PV of Minimum Payments 546 PV of Minimum Payments 455 PV of Minimum Payments 448 PV of Minimum Payments 276

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.51% Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00%Number Years Implied by Year 6 Payment 3.0 Number Years Implied by Year 6 Payment 2.6 Number Years Implied by Year 6 Payment 3.0 Number Years Implied by Year 6 Payment 4.0

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 124 117.0 1 119 112.3 1 102 96.2 1 55 51.92 111 98.8 2 112 99.7 2 106 94.3 2 51 45.43 96 80.6 3 82 68.8 3 93 78.1 3 49 41.14 81 64.2 4 62 49.1 4 63 49.9 4 38 30.15 63 47.1 5 50 37.4 5 47 35.1 5 32 23.96 & beyond 63 138.9 6 & beyond 50 87.5 6 & beyond 47 93.9 6 & beyond 32 83.4PV of Minimum Payments 546.5 PV of Minimum Payments 454.8 PV of Minimum Payments 447.6 PV of Minimum Payments 275.9

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol PYPLCurrent Stock Price $106.46Risk Free Rate 2.51%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 29.20%

(Mil) Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 1.18 27.39 4.45 82.05$ 97$ Range 2Range 3Range 4Range 5Total 1 27.39$ 4.45 82.05$ 97$