With Square IPOing today, many will have a renewed interest in the payment transfer space.
If you plan on holding something long-term because you believe there’s “growth”, you must be able to identify not only a company’s current operational drivers, but also any potential positive or negative catalysts, and whether the market has priced these in.
PayPal is one of those stocks that has shown success in it’s current operations, but I believe there are two major growth factors, one that the market hasn’t fully grasped and a separate but potentially even larger one, that will drive PayPal higher.
Strengths & Opportunities:
– First report as stand-alone entity beat consensus earnings estimates, and management reiterated their full-year 2015 guidance of EPS between $1.23-$1.27 and net revenue growth of 15%-18%. Also, has $6.7B in cash.
– Growth in mobile payment activity, with 345M transactions, an increase of 38% YOY. For FY 2014, mobile was 20% of total payment volume, or $46B. In Q1 2015, mobile payment volume had reached $18B , 30% of total payment volume.
– Catalyst 1-Mobile: Venmo, a fast-growing service that lets people (very popular with those damn Millennials) send money to each other using a mobile app, will be fully monetized by end of 2016. For Q3 2015, Venmo handled $2.1B in payment volume, which was triple the $700M sent through the app in Q3 2014.
– Acquired Paydiant, which makes mobile wallet technology that powers payment apps for major retailers, restaurants, and banks. More importantly though, it is the force behind MCX, a merchant-owned network (composed of Walmart, Target, CVS, among others) developing CurrentC, aiming to take on Apple Pay and other mobile services. Bought Xoom, which processes mobile international payments.
– Catalyst 2-Gigantic Potential Partner: The door is open for PayPal to partner with King of Retail, Amazon. With PayPal spinning away from Ebay, a small competitor that Bezos effortlessly laid the smack down on, and Amazon shutting down its mobile point-of-sale service, Amazon Register, a couple weeks ago, PayPal has game-changing opportunity.
-PayPal also provides the payment infrastructure for popular tech companies, such as Uber and Airbnb.
–Spin-offs have a history of doing well due to the ability to focus on a core business.
-Ichan and Klarman started positions in PayPal; good enough for them, good enough for me. Maybe Uncle Carl will give me a board seat?
Weakness & Threats:
-May be too slow getting into the mobile game and has the perception of being more desktop based.
-Heavy competition from major credit card companies, down-round unicorns, banks, and oh yeah, Apple Pay and Google Wallet.
-Valuation is a little high for me, but the discussed capabilities and strategic initiatives, as well as the possible catalysts, justify this price and valuation.
-Amazon gives mobile payments another shot, partners with a competitor, or simply acquires someone.
Price Target: Based on my projected enterprise value, my price target is $46-$48. If they were able to get in bed with Bezos and Amazon, I could easily see $60.
Conclusion: Making an investment decision must involve reading, analyzing, and creating a thesis through multiple sources of information. Anything worthwhile (for all things in life) will never just stare you in the face and involve minimal work. Disclosure: I’ve been long PayPal since early September.
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Really nice.
Thanks Edward, your content has been killing it lately. I take a more long term outlook, but your analysis of current and upcoming conditions is very insightful.
You are very gracious to say so, regarding my posts. I have enjoyed reviewing and giving strong consideration to the analysis in your work. Noting the participation of Seth Klarman is no small factor in the weight of Paypal’s business value.