PayPal — There Is Life After eBay, And It’s Better Than Ever
The first time I found out about PayPal was the same time I stumbled upon a website called eBay.com. So I’m talking a long time ago — back when the dial-up modems that sounded like R2D2 were our only gateways to the Internet. My first assumption of PayPal was it being the only option for performing online transactions. Accepting the Web as a technological wonder, my younger self was in awe of everything loading on the screen at the speed of 56 kbps. Thus, ever since then, the blue logo of PayPal has assured me of the legitimacy of websites and gave me confidence when making online purchases.
The current state of the Web is radically different from the one I experienced back when I was a kid. Now, we don’t “go on Internet”, but rather “go offline” from time to time to catch a breath from constant notifications and a flood of information. And more frequently than ever, we start our product search on Amazon, instead of hitting a mall on the weekend. Online transactions became synonymous with online shopping, as the times of online catalogs with no ordering options are virtually over. The number of online merchants grew significantly, adjusting to the ever-increasing demand for (sometimes totally unnecessary) stuff. Paying for mobile apps and making in-app purchases is not an out-worldly experience anymore. We are more confident to pay for services and products online now than ever before. And PayPal is the company that has been betting on this since its inception in 1998.
Besides the e-commerce evolution that has been going on, there’s one important aspect of mobile online transactions that has been receiving lots of attention lately: mobile peer-to-peer (P2P) payments. As people are shifting from carrying cash to using debit cards and online wallets, such payments become prevalent. A month ago, I purchased two roundtrip tickets to San Francisco and had my friend venmo half of the sum I paid for them. If you are not a millennial or have been living under a rock for the last few years, you might want me to clarify to you the previous sentence. You see, Venmo is the P2P payments app that has gotten so popular, that it doubled the total payment volume compared to last year’s quarter (bringing it to $8 billion in Q3) and has become a verb for sending money online. And guess what company owns Venmo? None other than PayPal Holdings, Inc.
You see, after the acquisition in 2002 until the year of 2015 PayPal was a part of eBay. Actually, its fastest-growing department. But the management recognized the potential of the PayPal as a separate entity and split eBay into two independent companies. Since August 2015 until now, eBay’s stock appreciated about 30%, whereas PayPal’s went up closer to 90% over the same period of time. After the split, PayPal has continued to expand its presence in the field of online transactions. They have kept benefiting from B2B and B2C digital products supporting both desktop and mobile online payment activity across the world. PayPal has built a very solid set of partnerships such as Visa and Mastercard, that allows them to speed up their services and lower the price of expenditures. Being one of the most well-established brands in the online payment sphere, they have landed many big-name clients like Uber, Airbnb, and Facebook.
Apart from the obvious e-commerce growth, the size of mobile commerce has been growing rapidly in the past years, and PayPal has been benefiting from this trend. According to comScore report, M-Commerce and E-commerce Measurement, U.S. FY 2016, “ad spending on mobile lags consumer time spent”. The report also states that in the retail category, 80 percent of ad dollars are spent on the PC, though only 33 percent of consumer shopping time is spent there. This leaves room for potential revenue from customers altering their purchasing habits in favor of mobile devices. Such promising future of the market has generated many of competitors.
There are several companies that are trying to get a piece of the online money transactions pie. Square, Android Pay, Zello just to name a few. However, it is quite difficult to imagine one of those companies overtaking significant portion of PayPal’s market share in the foreseeable future. The most serious competitor that I have to mention in this piece is Apple and its Apple Pay product. One important distinction that makes Apple stand out above the rest is its strong brand name and the control over both hardware and software side of the payment process. Apple’s proximity to the customer is outstanding. By embedding the payment function in Apple Watch and iMessage, they get two steps ahead of the competition that requires to install an app and complete the transaction in at least 5 clicks (First World problems, right?).
It has been a few years since the introduction of Apple Pay, an NFC technology that, as Tim Cook said in 2016, accounted for 75% of all contactless payments in the U.S. Given the high recognition of the brand, they were able to sign up the largest number of U.S. merchants compared to the competition, making it a better choice of a payment method for physical points of sale. I personally make Apple Pay transactions using my Apple Watch almost every day at a nearby store and find in extremely convenient not to reach out for my wallet but rather simply flick the wrist. By the way, the fact that all my friends still think that I do it just to show off signals the room for growth in this service category.
So, it is crucial to keep an eye on Apple’s developments and successes in the mobile payment field and make adjustments to your investments in the field of digital transactions. Especially because Apple might (as they do more often than not) become so powerful to the point when they start dictating the rules of the market. However, the field is growing and is yet to see any major roadblocks on its way. It’s certainly not a winner-takes-it-all game, so the outlook on the industry seems to be positive.
As for the fundamentals of PayPal, the company has no short-term or long-term debt, and the accumulated cash flow is around $3 billion. Even though it looks a bit overpriced with a P/E of 58, and the potential revenue growth might already be embedded in the stock price, I still feel quite optimistic about the company. At least for a few quarters I expect them to broaden their footprint and beat analysts’ estimates, leading the stock price to the new highs.
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