Free At Last
PayPal's (NASDAQ:PYPL) first steps as a public company were shaky. At first, the company was giddy. Then, after a series of daily declines, the company finally found some footing.
eBay's (EBAY) spinoff of PayPal is more aptly seen as PayPal's spinoff of eBay. It's only logical, seeing as PayPal's out-of-the-gate market cap of $45 billion is roughly 30% higher than eBay's market cap of $34 billion.
The true spinoff-ee aside, the two companies are keeping close relations. eBay and PayPal have vowed to better protect buyers by continuing to share information regarding transactions. The bottom line is that after their breakup, eBay and PayPal are still friends.
And this is important. In 2014, eBay was the source of more than 30% of PayPal's revenues, and helped drive a host of new PayPal members.
With that said, PayPal is beginning to "play the field," if you will. More than two-thirds of the largest 100 online retailers in the U.S. accept PayPal. In fact, PayPal's sales recently surpassed eBay's. I think we are able to say, with confidence, who wore the pants in the relationship.
(Source: Quartz)
The Company's Appeal
I digress: for those who are curious, "Goin for da low... Must whip to me" means "I'm selling these for cheap, but to pick them up, you must come to my house."
The above picture typifies PayPal's penetration into the younger generation. Though PayPal is accepted in some stores (you can use its "store locator" to see which ones those are), when I think of PayPal, I don't think of swiping a card at a store. PayPal is a company with a huge presence in online payments, and one that has separated itself from the major credit card companies.
It's also a company that teenagers - and parents, too - seem to trust. The company's mission statement has been the same since its inception, and it's a leading reason why consumers trust the service so much. In 2001, the company wrote: "Breaches of our customers' privacy and our security measures [...] could diminish severely consumer confidence in and use of our product." Therefore, PayPal is committed to ensuring the safety of its product for all customers and for years down the road. This is why I feel comfortable having my Seeking Alpha compensation sent to my PayPal account.
A Telling Anecdote
I used to buy and resell Nike (NKE) shoes. My main transaction platform was actually Facebook (FB); there are a plethora of groups dedicated to buying and selling sneakers. I speak from experience when I say the following two things: (1) not a single person in any of the groups was above the age of 30, and (2) not a single transaction was completed with Western Union (WU) or a credit card. They were made with trusty-'ol PayPal.
While I understand that the niche groups on Facebook account for a measly portion of PayPal's sales, I'm interested in hearing what Facebook has to say about the commerce features it has added, such as the one pictured above. If the company has good things to say about them, this can only help PayPal. It would be a true testament to the way young consumers are paying for things, and support the thesis that PayPal is a modern form of payment that appeals to the younger generation. While it isn't a reason to buy PayPal right then and there, I'd definitely listen to what Facebook has to say.
Moreover, the transactions that are processed by PayPal are almost instantaneous. It is reassuring for many to know that the money they were supposed to receive is, indeed, in their account. It allows them to, perhaps, send a package a day earlier. On that note, one aspect that coincides with eBay's buyer protection program is PayPal's customer support. PayPal is committed to ensuring the fairness of commerce. If a buyer claims that he or she did not receive the item he or she purchased, PayPal almost always sides with the buyer, and makes sure that he or she is reimbursed.
Valuation
Seeing as PayPal isn't a credit card, I don't think it's fair to compare the company to the likes of Visa (V) and MasterCard (MA). That said, PayPal has become credit-card-esque by offering loans ("working capital") that have a similar appeal to the loans offered by Visa and MasterCard.
The pen name "working capital" is a testament to PayPal's millennial appeal. To be a student in college with a mound of preexisting loans, the last thing one would want is to take out another one. While I'm not suggesting that PayPal is attempting to trick people into using its service under a misnomer, I do think that this service typifies the company's penetration of the younger generation. There's something cool about "working capital," and something scary about a "loan."
It's actually quite a brilliant plan. PayPal takes a fixed, customer-determined percentage of sales per day until the loan is paid back. Per the video on PayPal's investor relations page, there are no late fees, no periodic interest and no hidden fees. There is no credit approval required, and you pay off your loan as you get paid.
Again, while I don't think it's extremely fair to compare PayPal to Visa and MasterCard, the three are analogous enough to make one. From a price to earnings perspective, PayPal is trading at 25.5x 2017 earnings, Visa is priced at 21x 2017 earnings and MasterCard sits at roughly 19.5x 2017 earnings.
It is clear that based on the companies' prices to earnings, PayPal is the most expensive. However, most analysts are bullish on the name. Something must be missing.
(Source: Yahoo! Finance)
Looking out to the year ahead, PayPal has the most promising earnings growth. The following metrics are all derived from the mean earnings estimates for the respective companies.
First up is Visa, whose 2016 earnings are expected to grow by 16%. Next is MasterCard, which has estimated earnings growth of 19% in 2016. Then there's PayPal, whose 2016 earnings are expected to grow by 20%.
Whether a company with a comparatively high P/E but higher growth is a buy is not up to me. I am long PYPL because I understand the company's appeal to the younger generation. You may find teenagers annoying, but don't use them as an excuse not to profit. I think the recent pullback represents an opportunity to buy PayPal at a bargain.