Since PayPal (PYPL -1.51%) split from eBay, the company has created a path few could have foreseen. PayPal partnered with a broad cross-section of credit card companies and payment processors, beefed up its relevance by extending social payments app Venmo to merchants, and has made several acquisitions designed to expand the company's capabilities into every corner of the payments ecosystem.
In just three years since the breakup, PayPal stock has gained over 133%, significantly outpacing its former parent, and nearly quadrupling the performance of the broader market, as represented by the S&P 500 index. But if this prominent hedge fund manager is right, the company may just be getting started.
Making the call
Third Point hedge fund manager Daniel Loeb has reportedly taken a stake in PayPal. In a note to investors, Loeb cited PayPal's "dominant competitive position," saying the "company processes about 20% to 30% of all e-commerce transaction volume globally (excluding China)." He also pointed out that the company has a "10 [times] scales advantage relative to peers." Another attraction is PayPal's "checkout conversion rate of 89% -- almost two [times] that of credit/debit cards."
Loeb said he expects PayPal stock to gain nearly 50% over the next 18 months, detailing three reasons for his bullish stance. He believes each catalyst could significantly boost PayPal's revenue in the coming years.
Loeb sees loads of untapped potential in Venmo, which began life as a free peer-to-peer payment system that is extremely popular with millennials. PayPal has only recently began monetizing the platform. Several months ago, the company rolled out a "Pay with Venmo" button, allowing the app to be used for commercial transactions for the first time.
The hedge fund manager noted that Venmo has grown 25 times larger over the past four years and now accounts for about 10% of PayPal's transaction volume. "We think Venmo can contribute $1 billion in incremental annual revenue for PayPal within three years," Loeb said. For perspective, PayPal reported total revenue of $13 billion in 2017, so that's a sizable increase.
Dynamic pricing opportunity
Loeb believes that "PayPal is just scratching the surface on pricing power: The company recently shifted away from a 'one‐size‐fits‐all' approach in merchant contracts to a dynamic pricing model that reflects the value‐add of a growing suite of products."
PayPal has made numerous acquisitions over the past several months, which have significantly expanded its capabilities, including:
- Jetlore, which provides predictive artificial intelligence (AI) for retail companies
- Hyperwallet, which distributes payments to those that sell online
- Simility, an AI-based fraud prevention specialist
- iZettle, an international mobile point-of-sale provider
This growing suite of products will allow the company to build custom solutions for merchants of all sizes, supporting Loeb's optimistic outlook on pricing.
PayPal's acquisition of iZettle -- which has been called the Square of Europe -- was its largest ever at $2.2 billion, and expands the company's footprint into Europe and Latin America. Loeb maintains that this deal also expands PayPal beyond "the world of online commerce," which has a worldwide addressable market of $3 trillion, and into the realm of "offline commerce [with] $21 trillion in global addressable spend." Loeb expects the platform's growth to "accelerate as PayPal cross-sells iZettle into its existing network of 19 million merchants."
Overall high praise
In his note to investors, Loeb generously lauded PayPal, comparing it to two of the most successful companies of the digital age.
"Consumers love PayPal because it enables hassle‐free, one‐touch checkout across millions of online merchants," Loeb said in his missive. "We see parallels between PayPal and other best‐in‐class internet platforms like Netflix and Amazon: High and rising market share, untapped pricing power, and significant margin expansion potential." He also singled out PayPal CEO Dan Schulman, whom he referred to as "excellent."
Thus far, PayPal's made all the right moves, and I think Loeb may be on to something.