Will it Pay to Own PayPal?

What is PayPal Holdings Inc (NASDAQ: PYPL)? Well, you’ve probably never used Ebay (NASDAQ: EBAY) if you’re asking that. PayPal is a financial technology platform that facilitates payments between customers and merchants worldwide. But it’s also so much more than that, as we’ll see.

PayPal was founded in 1998, and acquired by Ebay in 2002, less than a year after PayPal had its first IPO. Since then you might say that PayPal has been chained to Ebay. In July, Ebay spun out PayPal as an independent company again. And I want a piece of PayPal, because most of the good things out of Ebay lately seem to have come from PayPal anyway. Now PayPal is free to expand.

Not that it hasn’t been. PayPal is SO much bigger today than in 2002 when Ebay acquired it for $1.5 billion. PayPal’s market cap today is about $43 billion. (Ebay is about 33 Billion for those keeping track)

So what is my experience with PayPal? I signed up for an account years ago because of my time as an Ebay seller. I still do it on occasion, but 10 years ago I was a fairly active seller. I mainly sold model railroad stuff that my dad acquired at yard sales, flea markets, etc. I don’t know much about model trains, except that the brass ones are worth a lot of money, and if you sell for a collector, he’ll probably just use the money to buy other trains on Ebay. (Personal experience)

But the important thing is that I have an account, and while I don’t use it much via Ebay these days, I still use it. Fun fact: of the largest 100 online retailers in the United States, over two-thirds accept PayPal. Other fun Facts:

PayPal has 165 Million active users, so it’s not just me and my wife. (sorry ladies) That number is up 11% year over year. PayPal has processed over a TRILLION dollars in payments; they are currently processing about $8,000 per second.

So what does PayPal look like, post Ebay? Well, Ebay sent PayPal on its way with $6.6 Billion in cash, with virtually no debt. Ebay’s last conference call was essentially a CC for both companies. Patrick Dupuis, PayPal’s CFO, said that the cash would be used “to focus on organic activity first, followed by M&A, and lastly buying back stock.”

Another good aspect of the spin-off is that PayPal is free to do business with companies that may have seen Ebay as a competitor. And of course PayPal will continue to benefit from Ebay’s business as well.

I think it’s pretty well established that PayPal is a market leader in online transactions. You go to a website, see something you like, and all you have to do is click on the PayPal buy button. Simple. But the REAL growth story here is in mobile payments. PayPal/Ebay made some important acquisitions that PayPal should benefit from in the mobile payments space.
First let’s talk about Braintree. Braintree is a platform that allows merchants to accept PayPal, Apple Pay, Android Pay, Bitcoins, and most major credit cards, and a few lesser known forms of payment. This is basically a one stop shop for many payment platforms, allowing online and brick-and-mortar merchants to accept many forms of payment under one umbrella. That sounds like convenience to me. If you’ve got your not-so-bright nephew (that you pretty much had to hire) running your cash register, you have to teach him just one system to accept all these forms of payment, as opposed to, say, seven.

With Braintree, PayPal also got Venmo, a peer-to-peer payment platform that lets you easily lend money to friends. (And hopefully get that money back) While traditional PayPal has much of this functionality (especially now that PayPal recently announced PayPal.Me), this is yet another source of potential PayPal users.

Then there’s Paydiant, a mobile wallet platform that allows merchants to create their own mobile apps, complete with their company specific rewards programs, etc… The little cards you get to keep track of your rewards at stores are becoming obsolete. That’s all moving to your smart phone. Why not use the same app to pay at the register, all handled by this PayPal subsidiary in the background? For a fee, of course.

PayPal acquired Xoom a few months ago to get into the international money transfer business. Xoom is mainly used by people in the US who send money to family abroad, as well as pay bills in other countries. This can all be done via smart phone.

Some of these services are more profitable than others, with many of the peer-to-peer transactions being free. But the important thing here is the move to mobile payments, and the opportunity to get more users into the PayPal system, with more and more transactions.

So this all sounds great, right? What’s the downside? Well, everyone knows that mobile and online payments are a huge business, and these markets are only going to grow. Other big players want in. Apple, Google, perhaps even Amazon. PayPal is leading the way with initiatives in buyer protection, and strategic acquisitions, but there are some big competitors out there.

Another concern is that, since 2002 when Ebay valued them at $1.5 billion via acquisition, today the company’s market cap is almost 30 times that. So some could argue that while the prospects look good, the valuation might already reflect said goodness. I’m going to say yes and no. Ebay basically took this little known company, made it known and trusted, expanded its user base, bought it other companies, grew it into an entity bigger than itself, then spat it back out into the marketplace. It is certainly worth much much more than it was over a decade ago.

But should it be bought right now, at these levels? As I write this Thursday night, the 4th of September, PayPal closed at $35.31. The horrible Monday the market had on August 24th saw PayPal hit a low of $30.00. I have a limit order in for $32.25. Last week in my portfolio update I mentioned PayPal, saying that I had an order in at $28.25. Doing the research for this article has made me a bit more comfortable raising my initial buy order. My second order, should it happen, might be placed somewhere around $28, but probably a little lower. I would use wide scales on the way down, since there are only a couple of months trading data on the company, and anything can happen, especially lately.

As always, feel free to look at my portfolio and see how I’m doing. And please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.
Thank you,
Michael, the Stock Picking Bartender

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