Digital Transactions Authoritative, insightful and timely information for payments professionals
By Jim Daly
Next week’s planned split of PayPal from parent company eBay Inc. has payments investors anticipating that plenty of locked-up value and growth opportunities will be released for the online payments leader.
PayPal began trading on a so-called “when-issued” basis Monday on the Nasdaq Stock Market under the ticker symbol PYPLV. That means investors can buy PayPal shares ahead of the company’s scheduled July 20 debut for regular trading on the Nasdaq, but orders won’t be settled until then. In the meantime, the when-issued trading is giving the market an indication of how investors assess PayPal.
And so far, the assessment is positive, though some of the exuberance of Monday morning, when the when-issued shares opened at $38, has worn off. San Jose, Calif.-based PayPal was trading at $34.95 as of mid-morning Thursday, a drop of 8% since the Monday open.
Still, investors are ascribing 56%, or $42.6 billion, of eBay’s market value of $75.7 billion to PayPal, Digital Transactions News estimates. That calculation is based on Thursday morning share prices of PayPal and eBay, the latter of which was $62.03, and a count of 1.22 billion shares. That’s the number of eBay shares currently outstanding, and also the number of shares in PayPal that eBay shareholders will get July 17 under eBay’s one-for-one distribution plan.
San Jose, Calif.-based eBay bought PayPal in 2002 for $1.5 billion. If PayPal’s stock holds in the low $30 range, the company’s value will have appreciated 26-fold in 13 years.
PayPal’s high valuation comes from a number of factors, including its strong market position, opportunities opening up that it couldn’t pursue while owned by eBay, and a pile of cash to go shopping. The company already has $2.37 billion in cash and cash equivalents on its balance sheet, and eBay will inject another $3.8 billion ahead of the spin-off for total cash of $6.17 billion, according to a June PayPal regulatory filing.
“They’re also generating nearly $2 billion in cash [from operations] every year,” says analyst Gil Luria, a managing director at Los Angeles-based Wedbush Securities.
PayPal already is putting some of that cash to work. Last week it announced plans to buy San Francisco-based online remittance-services provider Xoom Inc. for $890 million in cash. The Xoom deal, expected to close in the fourth quarter, will still leave PayPal with more than $5 billion in cash.
Some observers have speculated that an independent PayPal could pursue new business with e-commerce behemoths Amazon.com Inc. and Alibaba Group Holding Ltd., the huge Chinese online marketplace, opportunities closed to PayPal while owned by eBay, a competitor of both Amazon and Alibaba. Luria agrees that’s possible in theory, but unlikely, at least in the near term, because both companies have their own payments operations.
Instead, Luria sees PayPal continuing to make targeted acquisitions that enhance its services to merchants and consumers. “They appear to be aggressive in looking at companies to buy,” he says. In April, PayPal closed on its $285 million cash acquisition of prominent mobile-payments technology provider Paydiant Inc. Paydiant could further enhance the position of PayPal, which processed nearly 1 billion mobile transactions last year, as the mobile-payments leader. PayPal earlier bought Braintree, an online-payments specialist that includes the popular Venmo person-to-person payments service.
Luria also would not be surprised if PayPal revisits its so-far unsuccessful effort to become a major point-of-sale payments option, saying the company wants to become “more broad than just online.”
PayPal in 2011 launched an effort to become a POS payments player, a project that landed home-improvement retailer The Home Depot Inc. as an acceptor and included Discover Financial Services as a partner to reach smaller merchants. But the initiative didn’t generate many in-store transactions.
PayPal has 162 million active customer accounts and processed $235 billion in total payments volume in 2014, up 26% over 2013, on 4 billion transactions.
Meanwhile, Xoom today unveiled “Xoom Mobile Reload,” a service that Xoom says will allow customers to instantly send airtime credits online from the U.S. to prepaid mobile phones in 22 countries, including Xoom’s leading markets of India, Mexico, and the Philippines.
