PayPal (PYPL, Financial) reported first-quarter 2015 results Wednesday, surprising both analysts and investors after delivering strong revenue and earnings when compared with consensus estimates. Subsequently, the company’s stock price rallied 2.50% Thursday before dropping back to its pre-earnings levels Friday.
The world’s largest online payments platform, PayPal, reported $2.54 billion in revenues for the first quarter, thereby beating analyst estimates of about $2.5 billion while adjusted earnings came out at 37 cents per share compared to the consensus estimate of 35 cents per share.
PayPal split from ecommerce giant eBay (EBAY, Financial) last year in order to concentrate on growing its core business in a market that is rapidly adapting to changes in consumer behavior. PayPal’s stock price has been significantly volatile since becoming an independent company. It has traded at a low of about $30 per share and a high of about $41 per share within a period of six months.
From a business perspective, PayPal has been focusing on developing and acquiring new technologies to catch up with consumer behavioral changes alongside stringent regulatory requirements in various parts of the world.
The company has also established payment partnerships with several Internet-based companies including China’s ecommerce giant Alibaba (BABA, Financial) and the world’s largest social networking company Facebook (FB, Financial). While Facebook provides PayPal with access to its massive user base, Alibaba gives it the license to provide payment services to China’s largest ecommerce company.
Notice that PayPal is still not accepted as a form of payment on Amazon (AMZN) due to its earlier partnership with eBay. Perhaps after the split things could change. In general, PayPal is setting itself up for sustainable growth, and there are a number of drivers that could play a crucial role in ensuring the company achieves its goals. Let’s examine them.
Mobile: While consumers continue to show strong resistance toward mobile wallets due to security concerns, PayPal sees mobile payments as one of its growth drivers in the coming years. The company’s presence on mobile platforms is far behind compared to its influence in online payments; given the increasing usage of mobile devices, all that the company needs to do is come up with the best technology for this market.
The company is in the process of rolling out Venmo payments for its merchant customers from which it can collect normal transactional commissions. PayPal paid $800 million in 2013 to acquire Braintree, the company that owned Venmo. Venmo allows people to make payments easily and also provides alerts when close to a particular store based on the user's shopping needs.
Internet of Things: Most people think of marketing and advertising opportunities when the subject of Internet of Things pops up. However, what some forget is the fact that these ads and marketing campaigns must be paid for, one way or another. With PayPal being the world’s largest online payments platform, it stands to gain massively with the rapid growth of Internet of Things and big data analytics.
Instore Payments: PayPal is in the process of growing its ecommerce partnerships. That list includes the likes of Facebook, Alibaba, eBay, Home Depot (HD) and several others. The company acquired Paydiant last year, whose technology allows users to work with "what a business thinks is best: Bluetooth, NFC, QR codes or even a combination of methods," as noted during third-quarter earnings last year.
This technology is seen as the perfect recipe for the company in gaining traction in instore purchases. Paydiant co-founder Chris Gardner told Mobile Payments Today in an interview that, while "People like to say it is NFC versus QR codes, the reality is that [Paydiant is all about] collectively solving a business problem, and the goal is to create great experiences for consumers, particularly how it pertains to retailers."
As such, PayPal, through its acquired technology in Paydiant, will be able to cater to the needs of all merchants regardless of what they prefer for electronic payment.
Online Banking: PayPal has a presence in nearly every country in the world. However, there are only a few countries where the online payments giant has rolled its entire service package. This is particularly because, in most countries, the idea of online banking is still in its infancy, which means that there are several structural issues that could arise.
Therefore, as online banking continues to grow in popularity and various financial regulatory bodies implement countermeasures against the risks involved in the industry, PayPal will slowly begin to roll out its entire service package in these regions, boosting revenue potential.
Conclusion
PayPal’s current valuation may appear to be a little over the top when compared to its peers. The company’s stock currently trades at about 39x P/E while the industry average stands at about 13x.
However, when you consider PayPal’s business moat in digital payments alongside its potential for growth in the next few years, the company makes a strong case for its current valuation.
PayPal has made clear plans to establish more presence in areas where it still comes short in the digital payments marketplace, and these are what will drive its growth for the next 10 years.
