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Dan Loeb, manager of Third Point Capital, sometimes an activist, is one of the largest hedge fund managers. Third Point's offshore fund has had an impressive annualized return of 15.1% versus 8.1% for the S & P 500 since 1996.
When a manager like Loeb makes a big bet, it 's probably a good idea to listen. Last July, Loeb described a new position: Pay Pal (NASDAQ: PYPL). With the recent liquidation of the market, PayPal is now below the level it was trading at the time and is 40% below Loeb's target price of $ 125 – so it may be time to take a look at Look at this leader in digital payments.
Competitive advantages
As a pioneer in digital payments for e-commerce (and, more recently, mobile commerce), Loeb claims that PayPal has a 10-fold advantage over its competitors. In the last quarter, PayPal had expanded its network to 244 million customers and 19.5 million merchants, and processed 2.3 billion transactions in the second quarter alone. This represented good growth of 15% in the number of customers and 28% in the number of transactions.
Source of the image: PayPal.
Customers tend to become familiar with PayPal by sending money either through PayPal or Venmo, its "centenary" affiliate. These customers end up getting used to using PayPal to make online purchases, where PayPal asks merchants to make money.
Merchants pay the PayPal checkout rate because PayPal makes it really convenient for online shopping without entering credit card information. In fact, the convenience of PayPal has enabled a payment conversion rate of 89% – double that of traditional credit cards. This closing power is extremely beneficial to merchants and explains why they pay about 2.9% plus $ 0.30 of PayPal transaction fees.
Growth prospects
Many investors appreciate the benefits of PayPal, which explains why its selling price is 27 times higher. Nevertheless, Loeb estimates that PayPal could outperform because of its underestimated growth potential in three specific areas.
Venmo monetization
It can be comforting for shareholders that, despite their 23% revenue growth in the last quarter, PayPal is not even considering monetizing the key Venmo property. The platform is a peer-to-peer payment app with a social media flair that appeals to millennia, which increased payout volumes by nearly 78% last quarter.
Although PayPal has not monetized Venmo since the start-up acquisition in 2013, this is about to change. Last year, PayPal introduced Pay with Venmo and added merchants to the platform, with the recent addition of Uber. PayPal also launched a Venmo credit card in June, allowing customers to use their Venmo balance to pay for offline purchases or get money at an ATM.
All of these initiatives should turn the powerful Venmo brand into real dollars. Loeb thinks that Venmo can add $ 1 billion in annual revenue in three years (PayPal has generated $ 14.5 billion in the last 12 months).
Dynamic pricing
Loeb also thinks that PayPal has another leverage to generate growth via dynamic pricing. PayPal has traditionally applied the same rate to all retailers and merchants; However, the company recently opted for a more aggressive pricing model, based on a growing range of artificial intelligence, fraud detection and big data services, as well as its core processing service. With nearly 20 million merchant customers, PayPal has a large customer base to which it can sell other value-added products.
Offline Trade Extension
Finally, while the online payment space is $ 3 trillion in global spending, the offline shopping market is much larger at $ 21 trillion. While PayPal has traditionally been an online payments provider, it is now interested in this offline market through the recent acquisition of iZettle. iZettle is sometimes called the "Square (NYSE: SQ) of Europe "- a point-of-sale service in Europe and Latin America PayPal has paid $ 2.2 billion for iZettle and is probably hoping to sell iZettle in parallel to existing merchants, while facilitating the acceptance of PayPal by This seems like a good match because it diversifies PayPal geographically while offering it a cross-selling opportunity and a competitive advantage for Square, considered a growing competitor.
Everything becomes clear
The younger generation is much more inclined to move towards digital payment solutions and, although PayPal's multiple PE is relatively high, I think this is justified. The company recently sold its PayPal credit portfolio to Synchrony Financial (NYSE: SYF)This means that PayPal no longer has credit risk and lenders generally get lower valuations than payment processors. Now that PayPal is more of a game processor and service provider than playing, Loeb's argument that the title is actually cheap at the current high "PE" multiple is well founded.
Billy Duberstein has no position in any of the mentioned actions. His clients may own shares of some of the companies mentioned. The Motley Fool owns shares and recommends PayPal Holdings and Square. The Motley Fool offers the following options: short January 2019, calls to $ 80 on Square. Motley Fool has a disclosure policy.
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