Payments

Five things you need to know about PayPal after its IPO

PayPal returned to the New York Stock Exchange in July 2015 – 13 years after it first went public in February 2002. What does PayPal’s IPO mean for the wider payments industry and how is it set to fare in the months ahead?

PayPal’s initial public offering (IPO) saw the company recently return to New York’s NASDAQ and it was a very different scenario from when the online payments solution first went public in 2002.

This time, PayPal is valued at $46 billion; has 169 million active customers; works with eight million merchants; and facilitates payments in 100 currencies. This means that when PayPal makes a move, the rest of the payments industry sits up and takes notice.

So what does the future likely hold for PayPal and the wider payments industry?

Analysts at New York-based Bernstein, the sell-side business of AB, have outlined what may lie ahead in a report entitled eBay/PayPal: The Leading Internet Wallet in the West – Our Thesis, a Stand-Alone Model, and Valuation.

1. Strong financial growth

The Bernstein analysts forecast that PayPal’s revenues should grow by 17 per cent compound annual growth rate (CAGR) over the next three years, to revenues of at least $10.8 billion. They forecast this would see PayPal generate $3 billion in EBITDA (earnings before interest, tax, depreciation and amortisation) – or net income – in 2016. PayPal’s total payment volume (TPV) is likely to grow in excess of 20 per cent CAGR in the next three years, reaching $336 billion in 2016.

2. More PayPal merchants

The report suggests that PayPal is likely to grow its merchant services segment by 24 per cent over the next three years.

The analysts say this merchant growth will be “driven by continued growth of PayPal’s user base, which tends to be wealthier and transact more than average online users, continued penetration of new merchants (we believe PayPal is present in less than 60 per cent of commercial sites) and capturing increasing share of current online merchants, as it up-sells increasing services to existing customers (all the way to controlling the full check-out experience) or due to better feature functionality”.

3. Establish a mobile lead

PayPal will continue to go from strength to strength on mobile, with the analysts believing it does not face significant competition from other mobile payment solutions – for now, at least.

“PayPal has a very strong presence in mobile, and we see Apple Pay and Android Pay at worst as minor short- to-medium-term headwinds to PayPal’s online TPV growth,” states the report.

The analysts note that adoption by PayPal app developers is “relatively high” and that its large existing merchant base is a real strength. Plus, the limited reach of Apple iOS devices and Apple Pay and the fragmentation of Android mean that PayPal will continue to innovate and thrive in the mobile payment space.

“It is impossible to dismiss a prospective threat from Google or Apple, given their scale and the assets they have,” note the analysts. “But PayPal’s position and the history of other potential threats (e.g. Google Wallet, Pay with Amazon) suggest to us that the threat is massively over-estimated by many and will not materialise in any significant way in the next 36 months.”

4. Product improvements

Bernstein’s analysts believe improvements to its existing products will be a major factor in PayPal’s future strategy.

One such product is One Touch, which allows online retailers to include a Buy Now button in their shopping apps. This makes is quicker and easier for the customer to make an online purchase.

“We think PayPal’s introduction of One Touch is important for two reasons,” the analysts say. “First, a more streamlined check-out experience will likely have a positive impact on TPV growth through increased usage and increased merchant adoption. Second, it may be the precursor of much improved product development execution for PayPal versus the past.”

The analysts add that their TPV and revenue forecasts don’t take these kinds of product improvements into account. So, in fact, PayPal’s revenues could grow more strongly than has been outlined in their report.

5. Expanding beyond payments

The analysts stress that PayPal has a major opportunity to expand into new products and services through its existing user and merchant bases.

“Over the last several years, PayPal has been quite shy about expanding the scope of its business,” they add. “We believe PayPal has many opportunities to create new financial service businesses, by extending new offers to its 160 million users and a large merchant base. These include peer-to-peer, consumer and SMB lending (credit) and money transferred, all areas mentioned by management (in passing) during the recent road show.”

PayPal is in a strong position to grow, innovate and challenge existing and disruptive payment solutions. It looks set to remain a firm favourite with customers and merchants alike and is likely to remain an important payment offering in the years ahead.

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