Why PayPal Holdings Inc (NASDAQ:PYPL)’S Future Is Bright
PayPal Holdings Inc (NASDAQ:PYPL) enjoys a leading position in digital payments market. With that, the company stands to take advantage of secular trends such as the explosion of Internet shopping better known as e-commerce and the rise of electronic of payments, which are rapidly replacing checks.
Nevertheless, as much as there is massive growth opportunity that awaits PayPal, the company will have to content with increasing competition. Whether it is because of the lower barriers to entry in digital payments space or everyone considers the industry to be lucrative, competitors of every form and shape are popping up and PayPal is among the major target.
This PayPal analysis article examines the company’s risk and opportunities to enable you make an informed investment decision. But first, here is a brief recap of 4Q2015 earnings.
PayPal Holdings Inc (NASDAQ:PYPL)’s 4Q2016 EPS reading of $0.37 exceeded the consensus estimate of $0.35. Revenue reading of $2.54 billion for the quarter also came above the consensus estimate of $2.51 billion.
What’s exciting about PayPal?
- Consumer trust
PayPal Holdings Inc (NASDAQ:PYPL) boasts more than 184 million accounts of which 14 million are merchant accounts. The company’s massive and expanding subscriber base clearly shows that users have much trust in the service and they believe it adds value to their lives. Therefore, the trust that PayPal has earned from its subscribers should both help it to continue attracting more subscribers and generate more revenue from existing subscribers by upselling them. Additionally, the trust is important so that PayPal can have a better defense against competition from established and startup rivals that are targeting to steal its users.
The chart below shows subscriber base:
There is massive growth opportunity for PayPal Holdings Inc (NASDAQ:PYPL) in the burgeoning e-commerce industry. The industry is not only growing rapidly but online shopping still represent only a tiny fraction of the global retail sales. In 2014, eMarketer estimates that e-commerce industry grew 22% to $1.3 trillion. But that was still less than 6% of global retail industry.
More rapid growth of the global e-commerce industry is expected in the next three years. By 2018, global e-commerce industry is expected to expand to $2.5 trillion, thus representing about 8.8% of the global retail sales. Although there are many digital payments providers coming up and could pose competitive threat to PayPal Holdings Inc (NASDAQ:PYPL), a large market like what is expected in the coming years should support many winners.
To take greater advantage of the opportunities that e-commerce presents, PayPal is simplifying checkout for online shoppers through its One Touch service. One Touch not only cuts the steps in online shopping, but also ensures that you don’t have to sign in every time you need to pay for an item using PayPal. Instead, when you sign in once, the platform keeps you signed in for six months and it is secure so there is no worry about someone hijacking your account.
PayPal has also entered into a partnership with Alibaba Group Holding Ltd (NYSE:BABA) to further bolster its e-commerce play. Alibaba is the largest e-commerce operator in China with nearly 80% of the market under its control. As such, working together with Alibaba should boost PayPal’s e-commerce fortunes.
3.Strategic investments and partnerships
PayPal Holdings Inc (NASDAQ:PYPL) recently invested in Acorns, a startup that provides simplified investment services targeting young investors. Acorns raised $30 million in a recent investment around and PayPal led the fundraiser, meaning it make the largest contribution in the funding round.
Acorns offers affordable investment services whereby it charges $1 per month for accounts below $5,000 and 0.25% per year on heavier accounts. The company currently boasts more than 850,000 accounts and 75% of those behind the accounts are millennials.
There are multiple benefits PayPal can draw from its association with Acorns. For example, the company can use the Acorns link to increase money transfer transactions on its platform. Additionally, Acorns could also help PayPal to increase customer engagement on its platform, which should make the platform stickier and increase the value of each account. Working close with Acorns could also boost PayPal’s loan business.
In another deal, PayPal also announced expansion of its relationship with Lavu, a provider of payment processing for the foodservices industry.
4.Strong subscriber engagement
PayPal Holdings Inc (NASDAQ:PYPL) is seeing a rise in the usage of its platform, which in turn opens more opportunities for the company to monetize the users.
PayPal reports that the average account transacts two to three times per month. But as the company adds innovative products, it hopes the number of transactions will increase to two to four transactions per week.
PayPal’s lending business is still in infancy and it is a great way for the company to increase usage of its platform.
5.Internal efficiency drive
PayPal Holdings Inc (NASDAQ:PYPL) is driving toward improving operating efficiency so that it can boost earnings. Among other things, the company is looking at streamlining global procurement and cutting costs. In 2015, about 10% of revenue in the year went to product and development expenses.
What’s worrying about PayPal?
- Stiff competition
Although digital payments market expanding PayPal has the economies of scale to take advantage of the anticipated large market, the company will have to contend with intense competition. It was hoped that Amazon could add PayPal as a payment option on its retail platform after PayPal separated from the parent eBay Inc (NASDAQ:EBAY), but Amazon us busy building its rival payment service. Apple Inc. (NASDAQ:AAPL) is also expanding its Apple Pay service to shoppers and it is already making nice with retailers and other vendors. There are also speculations that Apple is planning to expand into money transfer business, a move that would see the company launch more direct competition with PayPal.
As competition increases, PayPal Holdings Inc (NASDAQ:PYPL) is under pressure to pour more money into marketing efforts, which in turn into earnings. Additionally, intense competition has the potential of fueling risky bets that could in turn squeeze margins and profits.
PayPal Holdings Inc (NASDAQ:PYPL)’s board approved $2 billion in shares repurchase program, a proof of friendly shareholder orientation and confidence in the company’s cash flow generation.
PayPal Holdings Inc (NASDAQ:PYPL) is well-placed to ride the secular shift to online shopping and digital payments. The customer trusts that the company has earned and continued product innovation to fuel more growth in the future. However, PayPal must drive more internal efficiency and tackle competition to snap up maximum benefits.
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