Not that he’s always right, and not that just because if he does it, other investors should do the same, but if billionaire investor Carl Icahn is adding more Paypal Holdings (PYPL) to his portfolio, should we at least consider taking on a stake in PYPL as well?
It’s a premise largely in opposition to an idea penned by yours truly less than three weeks ago, which pointed out how PayPal stock was vulnerable to competition that didn’t care about turning a profit via its digital payments business.
In the interest of taking a fair look at both sides of the coin, however, a look through Icahn-colored glasses could at least prove interesting, if not mind-changing.
Icahn Still Owns Major PYPL Stake
If the names Carl Icahn and PayPal seem vaguely familiar together, that may be because he was the one who, back in 2014, initiated the break of PayPal from its former parent company eBay (EBAY), primarily as a means of unlocking the pent-up value of what would eventually be standalone PayPal stock.
Although the online-auction company initially dismissed Icahn’s arguments in favor of a breakup, by late 2014 they saw things his way. The split was completed in July of this year.
To his credit, Icahn is proverbially eating his own cooking. The market learned this week that he dumped his entire post-split stake in eBay last quarter, yet held into his PayPal shares. In fact, that some official filing indicated Icahn is still holding all 46.3 million shares of PYPL he received when eBay completed the spinoff.
It hasn’t been an easy trade for Icahn to stick with.
Pulling back from a starting price of $38 in just its first few days as a standalone company, the PayPal stock price finally started soar a week later, and at one point in late July was up nearly 12% from its initial publicly traded value. Since then, though, it has given up all of that ground. It’s currently trading at $36.26, and in late September was down nearly 20% from its spinoff value.
It’s not likely the start Icahn was expecting when insisting that PayPal was the growth side of eBay’s company and was being held back.
What Carl Icahn (Probably) Sees
One of the nice parts about being a billionaire is you can wait indefinitely for a stock to realize its full potential. This is what Icahn is doing with PayPal stock. And, as it turns out, despite the risks at hand, PYPL does have a few things going for it.
First, and perhaps foremost right now, PayPal is well positioned to win significant market share in the fast-growing international payments market.
The timing may or may not have been coincidental, but on Tuesday morning, PayPal published its second annual report of consumer spending trends and how/where shoppers buy goods. The report suggested an increasing amount of cross-border buying … a detail that underscored PayPal’s strong presence as a globally trusted digital payments name.
Bolstering its already-strong presence as an international money middleman is the recent purchase of peer/rival Xoom, which as R.W. Baird analyst Colin Sebastian explained after Apple (AAPL) revealed it was getting deeper into the peer-to-peer payment game:
“ApplePay remittance threat seems misunderstood. In contrast to the commodity domestic money transfer market, there are high barriers to entry in the cross-border remittance market, including regulations/compliance, costs and brand-building, and even more significant, management of fraud risk. We believe that combining PayPal’s scale and resources along with Xoom’s well-established remittance service should drive accelerating growth. While ApplePay could present a bigger challenge to Venmo, we believe there are clear advantages for a focused and cross-platform offering.”
Another reason the PayPal stock price could continue to rise: Despite missing revenue estimates last quarter, revenue was still up 15% during the company’s third quarter, and the total volume of payments made through PayPal was up 27% on a year-over-year basis.
Clearly, PayPal is doing something right.
Bottom Line for PayPal Stock
Though PayPal has some things going for it, and Carl Icahn’s long-term success record is respectable, his ability to be bullish on PYPL may or may not be an appropriate brand of bullishness for the average investor.
As was noted, he’s already a billionaire, and could afford to let the stock dwindle to zero if he so desired.
Most investors don’t have that same luxury.
It’s also worth noting that Shark Tank‘s Kevin O’Leary — who expressed concern three weeks ago that PayPal competitors could edge PayPal out by giving away what PayPal is selling — is concerned again now that Apple is moving further into PayPal’s payment turf. His specific concern is how PayPal performs a revenue-bearing service that is in many ways simply becoming a standard feature for commonly used mobile software and hardware. While it’s Apple’s initiative now, there’s no barrier to entry for any other newcomer that wanted develop such an app.
Investors should also be reminded that Carl Icahn won’t publicly disclose any sale of his PYPL holdings until after he’s done it.
In other words, if you’re following Icahn’s lead, be very careful.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
