PayPal Holdings, Inc. (NASDAQ: PYPL)
Sector: Financial Services
Headquarters: San Jose, California
CEO: Daniel Schulman
Amid weeks where the market has violent swings in both directions based primarily on headlines rather than actual results or actions, it is important to take a look at the fundamentals of the overall market as well as individual companies. We hope the previous posting provided insight into the broader market and that this posting will help to re-calibrate perspective onto company fundamentals which we believe will prove to be relevant once again as cooler heads prevail and earnings season gets underway.
It is our goal to provide a portfolio spotlight once a month, however, it has been a busy past couple of months for us and rather than produce sub-par portfolio spotlights, we put them on hold for a short time. In this spotlight we will examine PayPal Holdings, Inc. (PayPal) a company that is at the heart of an increasingly relevant component of the market – digital transactions and person-to-person to person payments (P2P). As with all new market spaces, competition heats up quickly and we can see that play out in a fascinating way in the digital and mobile payments space. The reason I find it to be so intriguing is the trust people are willing to put into apps and technology when it comes to moving money. This trust has been tested recently, as I’m sure you have heard (various data scandals involving large tech companies). This actually puts emphasis on the value of PayPal and we will dig into that later on.
Let’s begin with a brief overview of the company for those of you who haven’t used or heard of PayPal.
Company Summary
In 1998 the company began under the name Confinity as a security software developer, later merged with Elon’s Musk’s X.com, an online banking company, in 2000 and was renamed PayPal in 2001. After some management shifts, PayPal had its IPO in 2002 under the ticker PYPL. Not long after the IPO it was acquired by eBay. Fast forward through many years of growth, acquisitions, and gained recognition as a secure and useful payment service to 2015 when PayPal was spun off from eBay to once again be a separate publicly traded company under its previous ticker symbol PYPL.
Essentially what PayPal does is facilitate personal and business transactions, domestically and internationally. It’s also a digital wallet where you can store all of your accounts (credit cards, debit cards, checking accounts), enabling you to checkout with the click of a button rather than having to enter all of your credit card information every time you want to place an order online – providing a more convenient and secure transaction. A PayPal account enables you to send and receive payments to and from a variety of sources:
Bank account
PayPal Balance
PayPal Credit Account
Credit or Debit Card
Gift Cards and/or coupons
PayPal is also developing a checking account service to provide banking type services to the “unbanked” – those who are unable to open bank accounts and are therefore unable to participate in e-commerce the way the “banked” population can.
Company Goal
“To increase our relevance for consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform and using any device.”
With a general understanding of the company let’s take a look at PayPal’s Identified Strategy and their performance relative to that strategy:
Strategy: “Growing our core”
Result: Active Customer Accounts grew 15.23% and Total Payment Volume increased 27% in 2017 compared to 2016.
Strategy: “Expanding our value proposition for customers”
Result: Payment transactions per active account increased by 8.04% from 2016 to 2017. Increased use is indicative of increased value to the customer. This increase plus the growth in the number of accounts equated to a 24% increase in the number of payment transactions.
Strategy: “Extending through strategic partnerships”
Result: PayPal has partnered with many smaller banks who don’t mind being in the background, in order to expand PayPal’s offered services. Examples are: A Delaware bank partnership to issue debit cards and a Georgia bank partnership to offer photo check deposit.
Strategy: “Seeking new areas of growth”
Result: Note previously mentioned plans to reach the “unbanked” and enable them to do things they otherwise are unable to do without a bank account (take Uber rides or stay at an Airbnb). You'll also read below about some international expansion that is happening at PayPal.
It would seem PayPal is making efforts to fulfill their strategy and the company is seeing fantastic results and potential results as an outcome of those efforts. See below – nice visual of some metrics mentioned above.
Now that we know the company has and is implementing an effective strategy, we need to determine where the revenues come from, if those sources are sustainable, and if there is ample opportunity for continued growth.
There are two sources for PayPal’s revenue:
Transaction Revenues: (20% increase in 2017 compared to 2016)
Transaction fees charged to consumers and merchants
Additional fees on international transactions.
Other Value Added Services: (25% increase in 2017 compared to 2016)
Additional interest earned on PayPal Credit Loans
As you can see below, the majority of PayPal’s revenues are credited to Transaction Revenues.
Revenue Growth Opportunities and Stability
I could go on for ages discussing PayPal and digging into all of the growth opportunities. Rather than do that, I am going to provide you with some quick blurbs and then if you’re interested in learning more, I’ve provided several links to articles and websites where you can do more reading.
Venmo – PayPal’s person to person payment system that has seen rapid growth – Q4 YOY Growth = 85.7%.
The service is currently limited to the United States (Ding ding – huge global opportunity IF they can overcome the regulation barriers). Venmo makes money by charging a 3% fee when credit cards are used to send money as well as a 2.9% fee charged to businesses when customers transact using Venmo. Otherwise, the service is free for transfers made using a bank account or debit card. The user interface is basically social media for money transfers.
Security – Amid recent scrutiny of tech companies relating to data privacy and regulation, PayPal has a leg-up, being a company built on the premise of increased security. Not to mention, it has already been built around the hefty regulation of the finance space. When transacting using PayPal, you have the same fraud protection that you would have if you transacted using your credit card (full protection).
Tapping the "Unbanked" Market – PayPal is working to provide checking accounts to low income groups who can’t enter the banking ecosystem. Offering FDIC insurance on balances. This is a 30 million person market that currently has to pay high fees to cash checks and can’t even take an Uber ride or book an Airbnb.
Market Positioning – Financial services and payments are not easy industries to break into... PayPal is very well positioned for domestic and global payments and financial services. This positioning will more than likely open the door to additional partnerships for PayPal. Acquisitions of Braintree and Paydiant Inc. have only furthered PayPal’s capacity and ability to expand.
Safaricom Partnership – increases PayPal’s global reach, specifically in Kenya where there is a growing e-commerce market.
Modest Acquisition – This is fascinating and could be prominent soon in e-commerce. The idea is to have a “buy now” button in any location across any web-page. So to buy something, a customer doesn’t have to navigate to the seller’s page and then check out, they can pay immediately.
Potential Headwinds
Despite many positives, there are headwinds on the horizon for PayPal. Some of those include:
Amazon's intention to add the ability to make P2P payments to their smart speaker Alexa (ever expanding and testing the trust placed in technology – it will be fascinating to see if this takes hold)
Square’s Cash App services (similar model to Venmo)
Zelle – major bank’s response to Venmo
eBay, PayPal is becoming increasingly less reliant on eBay transactions, however, it does still comprise an estimated 13% of total payment volume. Keep in mind, it’s probable this is already priced into PYPL’s stock price – there was a hit of up to -11.5% in after-hours trading settling at -8.11% by market close the next day, following the announcement that eBay had signed up a new primary payment processor. Source
Summary
PayPal is a leader in an increasingly relevant market space – digital transactions and person to person payments. The company is well positioned in the global market to enable international transactions. This sets up well for further partnerships domestically and globally. Strong reputation of customer protection and safety in an environment where consumer privacy is being called into question at large tech companies. Competition is hot in the digital payments space and it will be fascinating to monitor and watch this play out in personal and business transactions.
We hope this Portfolio Spotlight has provided some value to you. Stay tuned for the next one!
Authored by: Jeffrey Gardner, Financial Advisor The information presented above has been prepared for informational purposes only and the commentary represent the opinions of the author and are subject to change at any time due to market or economic conditions or other factors.