The Honey Acquisition Could Be the Next Big Mover for PayPal Stock

Recently, PayPal Holdings (NASDAQ:PYPL) announced that it would be spending $4 billion to buy Honey Science, a technology platform that helps users save money while shopping. How it will affect PayPal stock in the long term is a little complex.

The Honey Acquisition Could Be the Next Big Mover for PayPal Stock

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This deal has provoked a great deal of controversy. Honey is not a large business at this time, and its last funding round was for far less than PayPal just offered for the firm. Is PayPal making a shrewd move or a strategic blunder? And what’s it mean for Paypal stock going forward?

Our Aaron Levitt broke downwhy Paypal is so keen on making this move for Honey. According to Levitt, while Paypal has done a great job expanding its share in the payment space, it hasn’t done enough to interact with consumers prior to them getting to the checkout stage of their online purchases. Enter Honey.

By controlling more of the online shopping process, Paypal should be able to help funnel more traffic into transactions that end up getting processed through Paypal rather than other means. As Levitt explains, rivals are making more and more sophisticated entrants into the payment space, and will soon eat away Paypal’s market share if it sits idly by. This Honey acquisition would be a forward-thinking effort to extend Paypal’s first-mover advantage and knock the competition back a step or two.

Additionally, it’s worth noting that while Honey is not a sizable business, yet it is profitable already. This reduces the risk to Paypal. They may be overpaying, but it’s not likely to be a disaster for PayPal even if the $4 billion valuation is a stretch. Notably, Paypal sees the deal being accretive to earnings by 2021.

Honey: Has PayPal Kicked A Beehive?

While there is clearly some potential upside for PayPal stock with Honey, they paid a huge price. Honey has around 17 million active users every month. This means that PayPal paid more than $200 per person who uses Honey regularly. That’s simply a massive price. How long will it take PayPal to earn anything close to that amount back from each Honey member?

Coupons and price-saving services don’t usually attract high-margin free-spending customers in the first place. Other stocks targeting online savings, such as Groupon (NASDAQ:GRPN) haven’t exactly been huge winners. There’s also a ton of apps that already compete with Honey in the digital coupon space.

If PayPal is able to use its size to drive the competition off, maybe this deal becomes a long-run winner. I think the market is right to be skeptical for now, however.

Two of Britain’s Top Funds Love PayPal Stock

One interesting thing with PYPL stock is that it has attracted some surprising institutional investors. For example, two of the United Kingdom’s top mutual funds both have maintained large positions in PayPal stock over the years.

Both Fundsmith and Lindsell Train have owned PayPal faithfully; Lindsell Train has been a shareholder since the eBay (NASDAQ:EBAY) spin-off days. Fundsmith and Lindsell Train are two of the UK’s biggest funds, and both have delivered jaw-dropping returns; Fundsmith is up 153% and Lindsell Train is up 148% over the past five years. Those figures crush both the S&P 500 and the relevant British benchmark.

Both of these rock star mutual funds have PayPal stock as a top-five holding. That’s a surprising and reassuring endorsement as these funds are viewed as Warren Buffett-style conservative buy and hold shops. The two funds’ other shared holdings are much more conservative, with both funds also owning names like Pepsico (NYSE:PEP) and liquor maker Diageo (NYSE:DEO).

Yet they own large stakes in PayPal; they have faith in the company’s consumer reach. In the past, for example, Lindsell Train has said that PayPal has a fantastic brand and will pick up more and more loyal users over time; they also believe PayPal is more resistant to competitive pressure from the credit card issuers than analysts expect.

PayPal Stock Verdict

Regardless of your outlook on the Honey deal, do keep in mind that PYPL stock’s current market cap is $125 billion. Sometimes a small deal can turn out to be a home run, see Facebook (NASDAQ:FB) buying Instagram, for example. But Honey isn’t likely to make a huge difference in PayPal’s overall trajectory.

On the other hand, at worst, it will only cost PayPal stock about 3% of its market value if Honey ends up being a worthless acquisition in the long run.

And I have to give a ton of credit to PayPal for developing a credible investment story over the years, and attracting superstar investors into the fold. PayPal has built something great since it split off from eBay.

That’s what makes this Honey deal all the more perplexing. Companies like PayPal and Square (NYSE:SQ) are compelling vehicles to play the “less cash” society investing theme. So why do these firms keep diluting themselves with less attractive side businesses such as Square’s meal delivery service, or this $4 billion app acquisition by PayPal?

If the opportunity is as bright as it seems, there’s no need to add more distractions to the mix. Perhaps Honey really will drive much more traffic through PayPal’s main lines of business, but I’m far from convinced at this point.

At the time of this writing, Ian Bezek owned DEO and FB stock. You can reach him on Twitter at @irbezek.

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