PayPal shares are slipping today following the news that Apple may be working on a competing digital payments platform. However, PayPal may not have much to worry about despite Apple’s popularity because other competitors have thus far failed to take a significant bite out of its revenue.
PayPal has long faced threats
The report from The Wall Street Journal indicated that Apple was negotiation with some big banks in the U.S. to develop a mobile person-to-person payment platform to compete with Venmo, which is PayPal’s platform for mobile person-to-person payments. In September, the company also announced a companion person-to-person payments service called PayPal.me.
The first London Value Investor Conference was held in April 2012 and it has since grown to become the largest gathering of Value Investors in Europe, bringing together some of the best investors every year. At this year’s conference, held on May 19th, Simon Brewer, the former CIO of Morgan Stanley and Senior Adviser to Read More
BTIG analysts Mark Palmer and Giuliano Bologna point out in a report dated Nov. 12 that PayPal has been facing threats for competition for the last 10 years or so. In fact, they think that about “every year or two” over the last ten years, a new competing service from another “giant technology firm” has attempted to blaze a trail into the digital payments space and steal share from PayPal, the global leader in the space.
Some of the competitors that have popped up over the years include Amazon Payments, which was released in 2007, Square, which was started in 2010, and Facebook Credits, Google Wallet, and Stripe, which all were launched in 2011. Also Visa released its V.me platform in 2012, and Apple Pay was launched last year.
Apple less of a threat
However, thus far none of these platforms have changed PayPal’s trajectory, as the BTIG team notes that PayPal’s third quarter total payment volume climbed 27% year over year to $70 billion.
Interestingly, the analysts think any person-to-person payments platform from Apple wouldn’t even be as much of a threat as some of the others could have been. The reason is because PayPal’s core business isn’t in mobile payments. About 80% of the company’s total payments volume in the third quarter came from the Merchant Services business, and Venmo isn’t even a part of that.
Venmo has differentiation on its side
And even if Apple does wade into the space with an offering of its own, Palmer and Bologna note that it faces “an app with a considerable first-over advantage and a loyal following.” They add that Venmo sets itself apart because it also has an underlying social platform. That platform enables users to attach notes to their transactions, and those notes are posted to a real-time news feed.
In all of 2014, Venmo garnered $2.4 billion in total payments volume, but in this year’s third quarter alone, the app generated $2.1 billion in total payments volume. The app is geared toward people who are doing things like making a payment on a personal loan or splitting a bill, such as in a restaurant. Millennials are extremely loyal to the app, as the phrase “To Venmo” is common among members of the generation.
Venmo offers room for PayPal to grow
Currently, PayPal is not monetizing Venmo because it doesn’t charge any transaction fees. However, management said during the third quarter earnings call that they are planning to start trials of enabling Venmo users to buy goods or services from PayPal merchants through the app. Chief Executive Dan Schulman expects the app to be fully monetized by the end of 2016.
The BTIG team doesn’t think many analysts are assigning much value to Venmo, so they see any such monetization efforts as offering the potential for upside or option value rather than “a core value” of PayPal stock’s value.
Google to acquire PayPal?
Analysts from various firms have been speculating for some time that PayPal could become an acquisition target since its spinoff from former parent company eBay, and Palmer and Bologna repeat the case. They suggest that Google’s inability to make any progress in the digital payments space, plus news like the story about Apple getting in on the game, might make Google management consider placing a bid for PayPal and then combining it with Google Wallet. They believe that this could be “the most efficacious means through which they could position their company to be a long-term winner in the space.”
“The upshot for PYPL could be a takeout at a healthy premium, an outcome that (ironically) would be facilitated by enhanced competition in the mobile payments arena,” the analysts add.
BTIG has a Buy rating and $48 per share price target on PayPal. Shares of PayPal slipped by as much as 2.92% to $35.27 per share during morning trading hours today.