PayPal: Temu to the rescue — or maybe not

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PayPal is in a funk. Investors have soured on the stock. At their peak in 2021, shares in the digital payment powerhouse were worth more than $300 each, giving the company a market capitalisation of $362bn. These days they trade for less than $60. The valuation, at 11 times forward earnings, is at a record low.

Could the advent of Temu, a fast-growing discount ecommerce platform linked to one of China’s top retailers, finally give investors something to cheer about?

Their worries focus on Paypal’s higher-margin branded unit. This makes money every time a shopper clicks on the PayPal branded checkout button.

Stiff competition from the likes of Apple, Google, Affirm and Afterpay is squeezing the business. Its payment volumes grew just 5 per cent last year, compared with a compound annual growth rate of 26 per cent between 2018-2021.

Temu sells ultra-low-price clothing and knick-knacks mostly made in China. It has exploded in popularity since its debut last September. The app, owned by PDD (formerly Pinduoduo), is currently the most popular shopping app in the US, ahead of Amazon and Walmart. Visits to Temu’s website have increased from 7mn in September 2022 to nearly 300mn in August 2023, according to Similar Web.

PayPal is among available checkout options. Mizuho analysts reckon Temu accounted for about 2 per cent of incoming website traffic to PayPal in August. They think that as Temu grows in popularity, it could become a meaningful source of revenue for PayPal.

There are many stumbling blocks. For starters, incoming website traffic is an imperfect proxy for checkout share. Second, Temu’s customers in the US tend to snap up bargain items such as 10 pairs of socks for $2 and $5 shower caddies. PayPal’s take must be slim. And how long can low-cost retail platforms such as Temu last, given high cash burn?

The upshot is that new CEO Alex Chriss needs to revive PayPal via self-help. He can rely very little on Temu and its bargain basement trinkets.