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Summary

  • Bloomberg reports that the next iPhone will feature a payment platform and that Apple has secured a partnership with major payment networks, banks and retailers.
  • Apple seems very serious about mobile payments and could take share soon. This is a major threat to eBay’s PayPal as explained in our July article.
  • We remain Sellers: if eBay doesn’t unload most of its PayPal shares soon, PayPal is likely to become a valuation burden for the group due to rising competition.

Bloomberg reported yesterday that Apple (NASDAQ:AAPL) would turn the next iPhone (to be unveiled on September 9) into a mobile wallet through a partnership with major payment networks Visa (NYSE:V), MasterCard (NYSE:MA) and American Express (NYSE:AXP), banks and retailers. This suggests that Apple is going big on mobile and online payments and that it could gain significant share pretty soon at the expense of eBay's (NASDAQ:EBAY) PayPal in view of the dominance of iOS in global mobile transactions: according to research firm Adyen, the share of payment transactions taking place on a smartphone or tablet grew to 19.5% in December 2013 from 12.6% in December 2012 and close to 73% of these mobile transactions took place on an iOS device vs. 27% on Android devices!

In our July article "eBay: A Short Idea On PayPal's Upcoming Woes," we commented that even if PayPal is a high-quality business and is still in a near-monopoly situation, competition is heating up and is a major threat to the business. Indeed, promising growth prospects and comfortable take rates (3.5% at PayPal in Q2) have been attracting the attention of tech giants Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Facebook (NASDAQ:FB) and Apple, not to mention start-ups such as Square. Increasing competition will obviously put pressure on PayPal's take rates and margins, suggesting that revenue and earnings growth could stall in coming years. As a reminder, PayPal is the group's most valuable asset. It accounts for more than 40% of eBay's revenue, is the main growth driver (20% revenue growth in Q2 vs. 13% growth at group level) and is valued by analysts around $40bn (60% of eBay's market cap).

The Bulls argue that rising competition is not a major issue as the pie is growing. We would even say that the pie will probably grow even faster with mobile payment initiatives from Apple and peers likely to attract new customers. But if we assume that the market grows at 20-25% and that PayPal loses 10-20% market share, its revenue growth could be halved in coming years. This is not what investors are expecting from eBay and the derating risk thus significant. In all, we remain sellers of the stock as we believe that the upside scenario (eBay moves extremely fast and unloads most of its PayPal shares) is unlikely at the moment.

Source: Update: eBay - Apple Knocking On PayPal's Door