The hottest new IPO of the summer will be PayPal Holdings Inc., the world’s best known online payment service, which started trading on a when listed basis on July 6, 2015, under the ticker PYPL, according to The Financial Times. PayPal is supposed to officially trade on the U.S. NASDAQ market sometime later this month.
PayPal is attracting a lot of attention because it is a fascinating company that has the potential attributes of both a growth stock and a value stock. Most of the market interest in the payment solution seems to be based on the contention that it would be a growth stock.
What You Should Know about PayPal
Here are a few basic facts about PayPal that investors should be aware of before it hits the market:
- This is PayPal’s second initial public offering (IPO); PayPal initially went public back in 2002, but it was quickly acquired by online auction company eBay Inc. (NASDAQ: EBAY). PayPal has operated as a subsidiary of eBay ever since even though its growth has eclipsed that of the parent company.
- PayPal is potentially far more valuable than eBay is. The Financial Times estimated PayPal’s potential market capitalization at $44 billion (€40.19 billion). The combined market capitalization of eBay and PayPal was $74.65 billion (€68.19 billion) on July 7, 2015, according to ycharts.com. If the Times’ estimate of PayPal’s value is correct, eBay’s standalone market cap would be around $30.65 billion (€28 billion).
- PayPal is a cash cow with growing revenues. PayPal revenues made up 44% of eBay’s revenues in Fourth Quarter 2014, according to an eBay press release. Since eBay reported a TTM revenue of $18.09 billion (€16.52 billion) on March 31, 2015, we can estimate PayPal’s revenues at $7.96 billion ($7.27 billion).
- PayPal reported a total Payment Volume of $64.3 billion (€58.74) in Fourth Quarter 2014, up 24% from the year before. PayPal’s net Total Payment Volume for 2014 was $228 billion ($208.27 billion).
- PayPal had 162 active digital wallets in Fourth Quarter 2014.
- PayPal has greatly expanded its capabilities through acquisitions. It acquired payments processor Braintree Inc. in 2013. As part of that deal, PayPal also got the very impressive peer-to-peer payment solution Venmo, which some observers think could be a superior payment solution to Apple Pay. PayPal just acquired Xoom Corp (NASDAQ: XOOM), an American money transfer company. The Wall Street Journal reported that the Xoom detail could give PayPal the best global remittance franchise and the best risk management technology in the industry.
- PayPal is also a major lender. Entrepreneur reported that it made 35,000 loans, worth more than $200 million (€182.7 million), to 20,000 small businesses in the United States through its Working Capital Program between 2013 and 2015.
The Value Case for PayPal
PayPal does meet some of the classic criteria for value stocks like those favored by Berkshire Hathaway’s Warren Buffett. Some of PayPal’s value criteria include the following:
- Like many of Buffett’s favorite companies, PayPal is not that sexy; it operates in unexciting businesses such as small-business lending and payment solutions that make it unattractive to many investors, yet it makes a lot of money.
- PayPal generates a large flow of cash, or float, with its core business that it can use to cover expenses or make acquisitions. This makes it a great deal like one of Buffett’s favorite acquisitions: insurance companies, which generate large amounts of float from premium payments. Much like an insurance company, PayPal generates a lot of cash with its payment and lending businesses. That gives PayPal the ability to make acquisitions and allows it to weather economic downturns and other problems.
- PayPal also meets Buffett’s famed idiot test. That it is so simple that even an idiot could run it if necessary. Despite the technology involved, PayPal’s money transfer, online payments and lending businesses are actually very simple and easy to understand. They seem to pass the idiot test, which is best summed up by Warren himself in this quote:
“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”
The Growth Case for PayPal
Despite its value attributes, PayPal can also safely be described as a growth stock. Some of the features that make PayPal a growth stock include:
- Its Total Payment Volume is growing at an impressive rate. It grew by 24% between Fourth Quarter 2013 and Fourth Quarter 2014.
- Some of PayPal’s businesses are growing even faster. Venmo’s total Payment volume increased by 29% between Third and Fourth Quarter 2014. PayPal’s Merchant Services Total Payment volume grew by 24% during 2014.
- PayPal’s international business is growing fast as well. It generated $1.1 billion (€1 billion) in revenue in Fourth Quarter 2014, up 17% from the same period in 2013.
- PayPal is also growing fast in the mobile segment. It processed $46 billion (€43.85) in mobile payments in 2014, a 68% increase over 2013. Mobile payments now make up 20% of PayPal’s business.
These numbers indicate that PayPal has a lot of momentum right now. Although, it faces serious competition in the payment sector from the likes of Amazon.com Inc. (NASDAQ: AZMN), Apple Inc. (NASDAQ: AAPL) and Google Inc. (NASDAQ: GOOG), all of which are aggressively marketing digital wallet solutions of their own.
Will PayPal Be a Growth Stock or a Value Investment?
My take is that PayPal would be a value stock that has a lot of potential for growth because of the industry it operates in: digital payment solutions. The industry is growing fast and generating the momentum that is driving PayPal’s growth.
PayPal would be a good value investment if its share price were to stay relatively low. Unfortunately, that is not likely to be the case, because of the ongoing bull market for American stocks. The high demand for American issues and technology solutions is likely to drive up the price for PayPal shares as soon as they become available.
The best strategy to take on PayPal is to adopt a wait-and-see attitude. It will take a few weeks or a few months to see if PayPal develops the kind of momentum that has propelled market favorites like Tesla Motors and Amazon in recent years. If that momentum does not develop, PayPal could be a great value investment.
