The success of PayPal Holdings Inc (NASDAQ:PYPL) spawned the investing careers of Peter Thiel and Elon Musk — neither of whom need an introduction as the head of Founders Fund and Tesla Inc (NASDAQ:TSLA), respectively.
And PayPal has come a heck of a long way itself. What began as a service primarily running the online payments facilitator for eBay Inc (NASDAQ:EBAY) in the 90s and early aughts has morphed into a mobile and offline transaction platform.
It’s now a $65 billion company and the major domestic player in the mobile and offline payments market with a respectable cross border business. Their network is impressive as well with 200 million accounts and 15 million merchants. Neither Visa Inc (NYSE:V) nor Mastercard Inc (NYSE:MA) come close.
With such a large total addressable market (TAM) in digital commerce and a head start, PYPL looks well-positioned to own the market. But not so quick. Competitors abound and the current valuation of 44 times earnings doesn’t leave investors with much of a margin of safety.
The Total Addressable Market
TAM gets thrown about in the world of tech with wanton abandon. PayPal posits a TAM of over $100 trillion in digital commerce and money. The pie may very well be that large, but the question is how much of it PYPL can actually take.
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PYPL is strong domestically, so it can be argued that the U.S. is its stronghold. But the massive retail markets in Asia in particular, have their own incumbents playing in this space.
Take one look at Ant Financial, a subsidiary of Alibaba Group Holding Ltd (NYSE:BABA), that has pushed its IPO until next year. Ant was valued at $60 billion last year, and Alipay, it’s dominant business, processes half of mobile payments in China. That’s a lot of pie.
In the lead up to its IPO, Ant Financial has been busily gobbling up local competitors in Asia e.g., Kakao Pay in South Korea, Ascend Money in Thailand, partnerships in Europe with First Data and Vodafone… the list goes on.
What does this mean for PYPL? There are lots of big hands digging into the same pie.
PYPL Strengths
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That all being said, PYPL isn’t going to get steamrolled immediately. Look at checkout conversion rates: 36% higher than competing wallets at 87.5%. That’s a compelling value proposition for merchants.
Account growth continues to remain strong at 10-11% quarter-over-quarter. Transactions per active account are up in the low double digits as well. Venmo, their free peer-2-peer app, has also been performing incredibly well with significant total payment volume growth.
Stiff Competition
Despite all that PayPal is doing, both in terms of initiatives to grow organically and M&A, competition with deep pockets loom large.
Apple Inc. (NASDAQ:AAPL) for one, has launched its own Venmo built into iMessage. Come this fall, this feature will automatically be a part of iOS 11.
From Recode:
“These services have typically been money losers for the new entrants in the space, but are seen as the gateway to the next generation of payment and personal finance services that could upend traditional consumer banking relationships. They are used for everything from splitting dinner bills to paying rent.”
So does Apple want to be a bank? Not now, but maybe someday.
For now, the new Apple Pay Cash card could have a more direct impact on a current Apple business: Apple Pay. Industry insiders believe the virtual debit card will be a way to introduce Apple Pay to new users, perhaps to younger consumers who don’t already have their own traditional credit or debit cards.”
Facebook Inc (NASDAQ:FB) too, in its quest to turn Messenger into an ecosystem of sorts, currently has checkout options where payments don’t take you to a third-party site. Rather, payments are done in Messenger. “Contextual commerce,” people call it.
I don’t think FB is trying to disrupt the online payments industry here. What does make me raise my eyebrow is that FB has an engaged active user base and merchants already in place. Nothing, except manpower, a bit of technology, and some regulatory compliance is stopping them from jumping in.
Competition and valuation concerns keep me on the sidelines of PYPL stock.
As of this writing, Luce Emerson did not hold a position in the any of the aforementioned securities.
