Paypal Holdings Inc (NASDAQ:PYPL) is leveraging its leading position in digital and mobile transactions with 210 million customer accounts to become an integral part of the checkout experience in major social platforms. PYPL stock investors have pushed the shares up 53% this year.
I had previously raised a concern that Paypal would run into a potentially insurmountable hurdle if the major mobile platforms like Android, Messenger, and Apple Inc. (NASDAQ:AAPL) tried to take this payments piece for themselves. And indeed, there were rumors (sometimes with real money behind them) every so often indicating that it was an avenue being explored.
Imagine Android wanting the basis points for their own top line. With such a large base of users, they would be able to eliminate Paypal as a payment option and direct customers to their own wallets, effectively cutting PYPL out of the loop.
Good news for Paypal: My concern turns out to be unfounded.
PYPL Keeps Closing Deals
Healthy growth numbers at PYPL and the multiple partnerships signed over just the past couple of months tell to me that mobile platforms like Alphabet Inc (NASDAQ:GOOGL) and social platforms like Facebook Inc (NASDAQ:FB) are more interested in facilitating payments as a means to increase user stickiness rather than owning the payments side to earn revenue. For now, they are content to let PYPL take its cut while they focus on user experience.
Amazon.com, Inc. (NASDAQ:AMZN) may be the only exception. With its scale — and a mobile wallet that only takes a few touches to complete a transaction — there is value in Amazon keeping this on its own turf. It makes sense not to pay third-party processing fees on hundreds of billions of dollars worth of transactions. That said, there have been talks between the two companies. Paypal has strength in its international reach, which would be useful to the ever-expanding AMZN. There are many other fish in the sea for Paypal though, if a deal does not go through.
To start with the big kahunas, FB and GOOG are sticking to their advertising model, which is predicated on engagement. Android Pay users on Google’s Chrome mobile web will be able to pay at millions of online merchants that accept PayPal, using their PayPal account and fingerprint authentication.
A deal struck with AAPL allows iTunes users to buy games, music, movies and in-app purchases with PayPal in the Apple App Store, iBooks, Apple Music and iTunes stores, including international markets such as Australia and parts of Europe. PYPL’s international reach is undeniably valuable.
PYPL’s Healthy Q2
The quarter showed healthy double-digit growth numbers across active customer accounts (up 80% to 6.5 million customers on a net basis), payment transactions per account (up 10%), and total payments volume (up 23% for a TPV of $106 billion). This drove an impressive 18% revenue increase.
Paypal’s reinvention to a digital payments platform in its own right has richly rewarded shareholders and the strategic partnerships will continue to fuel that growth. The product is moving toward a money central management role rather merely a checkout option, demonstrating deep value for merchants. I expect these partnerships with overseas merchants and banks to continue. [Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM) all inked deals with Paypal in July].
The user momentum is there. And with 60 million consumer accounts opted in to the quick-pay One Touch feature, adoption has been quick and successful. After the post-earnings run up, trailing 12 months P/E is at 48.8x. It feels a bit high, but we know multiples don’t exist in a vacuum. With that overhang of mobile platforms competing directly with PYPL now gone — and, given growth trajectory — it’s not an unreasonable valuation to pay.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
