A year ago, almost to the day, entrepreneur and Shark Tank personality Kevin O’Leary (“Mr. Wonderful,” for those who watch the show) opined that Apple Inc. (NASDAQ:AAPL) could create huge trouble for payment middleman Paypal Holdings Inc (NASDAQ:PYPL). How so? Apple Pay was unveiled, threatening to become the digital wallet of choice for all consumers, encroaching into PYPL’s territory with an easier-to-use alternative. By extension, the value of PayPal stock was threatened.
A year later, PYPL has largely proved O’Leary’s concern wasn’t quite merited… at least not to the dire degree it was voiced.
Significant changes have been made by PayPal, to be fair, but when looking back we can see the company is more in touch with the shifts in the payment landscape than anyone was giving it credit for.
In other words, PYPL stock isn’t the ticking time bomb some have made it out to be.
PYPL: Keep Your Friends Close and Enemies Closer
Earlier this year, owners of PayPal stock went a bit berserk when the digital payment outfit inked a deal to work with Visa Inc (NYSE:V) rather than against it. The two had opposed each other, but when it became clear the only outcome of such a war would be a stalemate, they teamed up to create a jointly operated payment option at cash registers.
PYPL stock plunged 9% in response to the news, as most investors felt the partnership posed a threat to PayPal, for several reasons (not the least of which was the fact that Visa was working on something that will compete directly with PYPL). PayPal CEO Dan Schulman, however, argued the not-so-great terms of the deal would be more than offset by a sheer increase in transaction volume the duo could co-create.
That’s why Schulman pulled the trigger on a comparable deal with Mastercard Inc (NYSE:MA) in September. Like the Visa agreement, PayPal will pocket less per transaction since it has to split fees with Mastercard. It’s going to drive considerably more transactions though. Better still, PYPL would easily inject itself into MA’s mobile-tap payment ecosystem.
Some owners of PayPal stock continue to grumble, admittedly for understandable reasons. Schulman made the right call though, even as he continues to look for other such partnerships.
Reality Check for PYPL Stock
When PayPal was founded eighteen years ago, online payments other than through credit cards weren’t even a thing. PYPL changed that, and even became the only real name in the business for several years, boosted by its relationship with eBay Inc (NASDAQ:EBAY). It could charge whatever it wanted because there was no alternative.
The world has seen some incredible societal changes driven by an explosion of technological progress though. Those companies that have adapted and embraced those changes have thrived. Those that haven’t, haven’t.
The parallels between the evolution of the digital payments business and the cable television business are clear. For a long while, traditional cable television providers thought they could fend off the cord-cutting movement spurred by the advent of Netflix, Inc. (NASDAQ:NFLX).
They couldn’t. Now cable providers as well as content providers are entering a race they never intended to run. CBS Corporation (NYSE:CBS) has unveiled a streaming service called CBS All Access. Time Warner Inc (NYSE:TWX), Walt Disney Co (NYSE:DIS), Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA) and Comcast Corporation (NASDAQ:CMCSA) all co-own Hulu.
Disney is also offering online access to some ESPN programming. Time Warner delivers premium movie channel HBO Go to online-only viewers. None of them initially intended to make the move, but they’re all better-positioned to survive by doing so. The same idea applies to the moves PayPal has recently made, and is still making.
Indeed, PYPL stock may be better served by entering into these questioned relationships than not.
Before the company partnered up with Visa and then Mastercard, it boasted 180 million active users. That’s a crowd, but not an overwhelming one. Visa and Mastercard collectively serve a much larger global customers base, and those consumers are increasingly tech-savvy and mobile friendly. That’s a crowd PayPal may have never been able to address at all.
Bottom Line for PayPal Stock
The latest news on the unlikely partnership front is Facebook Inc (NASDAQ:FB).
In October, the company unveiled a cooperative agreement that allows Facebook users an easy way to use PayPal to make mobile payments. It’s a brilliant move into fertile ground for PYPL stock. The bulk of Facebook’s traffic is mobile traffic, and PayPal’s Schulman firmly believes mobile payments are the future. With smartphones constantly in hand for those folks — with the Facebook app rarely turned off — the hurdle between PYPL and the vendor is practically nil.
Don’t be surprised if these deals continues to take shape for PayPal stock.
Yes, in all of these partnerships, PYPL is splitting revenue rather than garnering more for itself. It can’t afford to go it alone though, not just from a fiscal point of view, but from a marketability point of view as well. The irony is, PayPal stock may end up being worth more than what it may have been if it continued to fly solo.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
