Quick Thoughts – PYPL/GOOG

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Howard Mason

hmason@ssrllc.com

September 12, 2015

Quick Thoughts – PYPL/GOOG

There is takeover chatter[1] on PYPL with GOOG mentioned as a potential suitor. We believe PYPL will remain independent and that acquisition by GOOG in particular would be value-destructive. PYPL’s business model under CEO Dan Schulman is to act as a technology-agnostic platform integrating for merchants any payment type, not just the PayPal digital wallet. Indeed, the objective is to act as a payments gateway for 100% of merchant-client wallet and leverage the resulting data to support merchants in fraud risk-management and personalizing the shopping experience for consumers. This strategy is aligned with PYPL’s independence as Dan emphasized at the time of the IPO on July 20th: “being an independent company allows us to be a truly neutral third-party … and to partner with retailers”.

GOOG is not a neutral third-party and is not technology-agnostic. Retailers have deep concerns that Google would compromise their ownership and control of payments data with Loew’s, for example, remarking as follows: “What would those wallets be doing with that [transaction] data? Would they use it to steer consumers to competing stores? The control and ownership of the data is really important to all of us as retailers?” Retailer concerns around payments data were a key reason for the failure of Google Wallet at point-of-sale and, in order to avoid the same fate for Android Pay, GOOG committed to an infrastructure (through Visa VDEP and MasterCard MDES) that does not allow access to the payments data. A GOOG acquisition of PYPL would stop retailer adoption of the PayPal wallet and gateway in its tracks.

We see PYPL as more acquirer than target. With no debt and over $4bn in cash, the firm has a war-chest and is committed to expanding network effects, increasing the intensity of customer engagement with the brand, and broadening addressable market. The $890mm acquisition of Xoom announced in July is an example as it adds 1.3mm active customers, can be scaled to drive engagement in PYPL’s broader customer base (of 165mm active customers at end-Q1), and takes PYPL into the $600bn market for international remittances. On the merchant side, the $280mm acquisition of Paydiant announced in March will allow PYPL to partner with retailers for in-store purchases on retailer-apps and broaden relationships with retail-members of the MCX consortium, a Paydiant client, to include PYPL’s gateway services. We reiterate a price target for PYPL as an independent company of $45/share and refer to the thesis and valuation laid out in our note of June 11th titled “PayPal: Gateway Service to Integrate Offline and Online Commerce”.

  1. Briefing.com
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