MorningWord 11/13/15: You’ve Got Money

by Dan November 13, 2015 9:39 am • Commentary

After years of hype, mobile electronic payments, both consumer and peer to peer, have finally become a disruptive trend. And it suddenly seems there are hundreds of fintech startups as well as established tech behomeths now looking to dis-intermediate traditional banking services like lending and payments. But despite all of the headlines of late about Apple Pay (and Apple’s discussions with banks to create a peer to peer payments platform) PayPal remains the stalwart in the epayments space. The company rose from the ashes of the crash in the early aughts, and kept pace in p2p with their $800 million acquisition of Venmo owner Braintree in 2013.  Paypal recently spun-out from EBAY after 13 years and is currently the only pure-play U.S. listed company in the space.

Last October, when pressure was mounting from activists for EBAY to spin-out faster growing PYPL, it was my view that with the emergence of Apple Pay, and Facebook’s 2014 hire of former PYPL president David Marcus, that PYPL could be a target:

I think Google will have a fairly short opportunity to grab PayPal to better compete with Apple’s PAY before they get too much of a lead on their own service Wallet and then obviously PayPal itself.   I HAVE NO IDEA IF GOOGLE IS CONSIDERING THIS, BUT THEY SHOULD BE

Back in April I took a quick look at the emerging competition in epayments:

Oh, and more on PayPal. They better get their act together on mobile and in app, because Apple, Amazon, Google and Facebook are coming in a very big way. Which leads me to my main thesis on EBAY / Paypal. Once the spin is done I can’t imagine PayPal is independent for too long, and if I were Google or Facebook I might strongly consider buying Paypal to meet the Apple Pay threat head on.

Back on July 20th, following PYPL’s first report as a stand-alone, the WSJ laid out a fairly objective view of the current payments landscape and how PayPal fits in: PayPal Enters a Brave New World of Money Disruption.  Simply put, competition from the likes of Apple and Google will pose the biggest risks going forward, and the formidable competition from long time rivals Mastercard (MA) and Visa (V) remains unyielding.

In 2016, PYPL is expected to have $10.7 billion in sales growing about 16% year over year, just a tad below the expected $10.8 billion for MA, and well below the $15.2 billion expected for V. Yet PYPL trades a little less than 4x those expected sales with a market cap just below $44 billion, while MA trades 10x expected sales and V near 12x expected 2016 sales.  After all, PYPL is a tech company with fast growing peer to peer payments App Venmo, and recently acquiring online money transfer service XOOM. So what gives?

Shares of PYPL were sold off a bit this week (down 3%) on media reports of AAPL’s possible intentions to build a service to compete with PYPL’s fast growing Venmo, but if anything, this validates PYPL’s unique positioning, and if history has taught us anything is that it can be very hard to displace a first mover and longtime established player like PayPal.

As a standalone I suspect PYPL has a tough go as ecommerce heavyweights like Amazon (AMZN) and AAPL Pay push forward with in-App Buy buttons, and are well established on existing smartphone platforms and devices with near field communication chips for mobile payments.  Facebook likely has designs to monetize their $22 billion WhatsApp acquisition by creating a p2p payments system, and Google and Microsoft, well who knows, but they need to step it up.  So just as I have said on more than one occasion in the last year, PYPL is not likely to be a standalone for too long.  As we did in early September, with the stock’s recent pullback we will look for ways to finance the purchase of longer dated calls. Stay Tuned.