How PayPal is helping Walmart and Target fight Amazon

So how does an old-fashioned internet payment company,

PayPal funds

(PYPL), become a staple arms dealer in the raging war for e-commerce dollars, and why is it flourishing in the transition to smartphone e-commerce?

The simple answer is that while Amazon doesn’t need PayPal, everyone does. PayPal thrives because businesses demand a neutral and trusted digital intermediary for payments, and its platform of 254 million active accounts drives higher sales.

Consumers don’t want to re-enter their personal and payment information every time they order from another online retailer. As a result, PayPal benefits because it offers the possibility of quickly checking in a simple and hassle-free way on the 20 million merchant sites that offer its payment solution.

“PayPal’s first-mover advantage and scale gives it a huge advantage. Consumers don’t need more than a digital wallet, and merchants won’t offer unlimited payment options, ”wrote Mario Cibelli, director of hedge fund Marathon Partners, in an email to Barron. “PayPal appears to be particularly well positioned for non-Amazon mobile commerce.”

The size of the PayPal platform and the ubiquity of its payment button is a “distinctive value proposition” for the company, said Lisa Ellis, analyst at MoffettNathanson. Barron.

The company’s payment service dominates the web. Nearly 80% of the top 500 internet retailers use PayPal Checkout, seven times Amazon Pay, its closest competitor, at 11%, according to Ellis’ analysis. That’s a big deal for PayPal, as the Checkout button accounts for around 70% of their checkout volume and 85% of their sales, according to their estimates.

The Checkout franchise allows PayPal to sell other offerings to merchants, such as cash flow management, lending, and marketing.

“PayPal is trying to help retailers compete with Amazon with a wider range of services besides payments,” she said.

The business is also benefiting from the general rising tide of mobile e-commerce itself, which is simply booming. He said that when his merchant partners use PayPal, conversion rates for mobile shopping carts double. In other words, consumers are less likely to abandon their digital shopping carts.

At an investor conference last week, PayPal CEO Dan Schulman revealed that the company surpassed $ 1 billion in daily mobile payment volume for the first time on Black Friday, and it did. does Cyber ​​Monday again. In its most recent quarter, total PayPal payment volume on mobile devices grew 45% year-over-year and now accounts for 40% of its total volume, up from 34% the year before.

The stellar rate of market growth will likely provide a tailwind for PayPal for several years. EMarketer predicts that mobile e-commerce sales in the United States will increase by 30% next year and reach $ 514 billion in 2022, from around $ 208 billion this year.

“We are optimistic about PayPal’s multiple growth engines, fueled by favorable winds from mobile and e-commerce. The company’s commitment to openness, as evidenced by its expanding strategic partnerships, enhances the value proposition for users and strengthens their gulf, ”wrote Tiffany Hsia, AllianceBernstein Portfolio Manager Barron in an email.

PayPal bears say company deal expires

eBay

(EBAY), its former corporate brother, could significantly hurt PayPal’s finances. In 2020, PayPal loses its preferred payment status on eBay’s marketplace. But Ellis believes the damage will be contained. It estimates a negative impact of 4 to 5% on profits in 2020 and 2021.

Plus, says Ellis, there might be more opportunities to come up with other internet companies. Under a renegotiated deal with eBay, PayPal has more flexibility to make deals on large platforms.

And then there’s Venmo, PayPal’s popular money transfer app, which is growing rapidly and is popular with millennials. Venmo’s payment volume grew 78% year-on-year in the quarter. September. The company said in its latest earnings call that about a quarter of Venmo users have now participated in monetizable action such as “instant transfers” to debit cards.

“We’re also excited about what they’re doing with Venmo, which is still in the very early stages of monetization,” Hsia said.

So what is the benefit of PayPal at current levels? The stock has risen nearly 105% since it was released from eBay in July 2015, nearly quadrupling the respective performance of the S&P 500. On the surface, it’s not cheap. PayPal’s stock is valued at 30 times Wall Street’s estimated earnings for the next 12 months, compared to a three-year average of 28 times, according to MoffettNathanson.

But it’s down more than 10% from recent highs. And that could be a buying opportunity, given PayPal’s track record and expected growth.

Ellis expects PayPal to generate 20% annual profit growth for at least the next three years. This could lead to similar stock gains, assuming the company simply maintains its valuation multiple.

The advantage could be more. As concerns about eBay fade, investors should come to appreciate PayPal’s core value: two decades after its inception, the company remains a vital cog in the ecommerce world.

Write to Tae Kim at [email protected]