GVA Research on CNBC Asia: Here’s why PayPal is a buy in the near term
PYPL – Large-Cap “Pure Play” Growth Leader In Digital Payments: The Fri 7/17/15 tax-free common stock distribution of PYPL shares to EBAY holders, which was accompanied by a $3.8bn cash transfer to PYPL from EBAY and the execution of a five year payment processing operating agreement, has provided investors with a large cap (i.e. $50bn market cap) “pure play” on the growth in digital payments, a space where PYPL has been and remains dominant. PYPL is levered to secular growth in electronic payments and e-commerce (16% CAGR) and the emergence of mobile payments (28% CAGR). PYPL has 165mm active users (including 10mm merchants), operates in 200 countries, is accepted globally (68% of the top 100 online retail websites), and in 2014 drove $230bn in purchase volume. PYPL is to e-commerce what V & MC are to traditional retail. We expect investors will gravitate to PYPL as a core holding positioned to benefit from growth rates that outstrip V & MC (i.e. over last three years PYPL has grown at 2.2x V & MC global purchase volume). With 16% annual revenue growth forecast to 2017, PYPL will be the fastest growing of the large cap payment service providers.
PYPL – Three Factors Provide Appeal To Investors: PYPL is attractive near-term to investors due to 1) rising tide of digital payments, an area where PYPL enjoys incumbent advantages and is platform agnostic, should generate top-tier growth, 2) achievable, if not beatable, guidance over the medium term as profit margins improve on base of strong steady revenue growth, and 3) significant strategic value as leading commerce/content/social/device platforms are increasingly embedding payment capabilities to optimize platform/user/ad monetization.
PYPL – EBAY Still Drives Substantial Financial Performance: While EBAY represents 25% of PYPL transaction purchasing value (TPV), it does represent a higher percentage of revenue (29%) and EBIT. While the 5 year payment processing operating agreement limits EBAY’s ability to develop a competing alternative to PYPL, it does permit EBAY to work with PYPL competitors. Consequently, PYPL needs to diversify its customer base beyond EBAY to limit margin erosion from tighter processing pricing.
PYPL – With Tax-free Spin-off, Which To Own?: Following the PYPL spin-off, EBAY holders own two equities, PYPL a company forecast to grow EPS at a 20% rate through 2016 and EBAY where EPS growth is estimated to be 17%, lower but still attractive. At present prices (PYPL $40.87, EBAY $28.68), EBAY appears to be slightly more attractive valuation (Price-to-Earnings Growth (PEG) ratio of 0.98x vs. PYPL 1.65x) with more upside to its price objective (EBAY price target $36.50, +27% appreciation potential vs. PYPL price target $50.00, +22% appreciation potential). Both are attractive in our view and can be owned.