Fintech
PayPal shares could take more hits from Apple’s moves
Given PayPal (NASDAQ:PYPL) continued, strong growth and its large user base, coupled with PayPal stock’s low valuation, I continue to believe the stock will deliver strong long-term returns. Furthermore, the macroeconomic picture, while far from perfect for the company, should allow it to continue to post fairly solid financial results well into the future.
But PayPal will face stiffer competition Apple (NASDAQ:AAPL) Going forward. While I don’t expect these developments to significantly impact its performance, the company’s growth may slow slightly in the wake of these changes. More importantly, Wall Street appears to have lost confidence in PayPal following Apple’s moves, so PayPal shares are likely to fall further in the short to medium term. All in all, I currently view PayPal’s actions as a hold.
Strong and continuous metrics
In the first quarter, PayPal the top line rose 9.4% compared to the same period last year at $7.7 billion, while total payment volume increased 14% year-on-year to $404 billion. Even more impressive is the fact that its payment transactions per active account increased 13% year-on-year (YOY) to reach 60, demonstrating that user usage of the company’s services is increasing significantly . Finally, its earnings per share, excluding certain items, rose 27% year over year to $1.08, while the active stock monthly user base of just its Venmo service in the United States reached an impressive 60 million.
Also encouraging is that the number of first-time users of its debit cards increased 38% year over year last quarter, says CEO Alex Chriss reported in its first quarter earnings call. Debit card users, on average, produce nearly 20% more revenue for the company than accounts that don’t use debit cards, Chriss noted.
In a note to investors dated May 31, research firm New Street Research coverage began of PayPal shares with a “buy” rating. New Street expects the company’s new guest payment system, Fastlane, to increase payment volume and expects the company to increase prices on Fastlane in the future. Additionally, the company expects PayPal to improve Venmo monetization and increase debit card adoption rates in the medium term. And New Street expects the company’s profit margins to beat analysts’ average estimates in 2025.
A decent macro setup and a low rating
US retail sales up just 0.1% May compared to April. But Marketwatch declared, “Sales continue to increase at a pace consistent with stable growth.” Furthermore, according to a survey conducted according to the respected consultancy McKinsey, a considerable number of consumers expect to “go crazy” in many categories in the future. For example, 39% of respondents plan to spend a lot at restaurants, while a third plan to spend a lot on clothing. Another third say they will spend a lot on travel. Equally important, inflation did not rise to all last month. If this trend continues, investors may feel freer to spend more on discretionary items in the future.
On the valuation front, PayPal has a forward P/E ratio 14 times ratio. Given its strong growth, this is a very low P/E ratio.
Apple’s moves worry the streets
Earlier this month Apple introduced Tap to Cash which allows the iPhone users to transfer funds by placing their devices on other iPhones. The technology giant also disclosed which would allow iPhone owners to “access installment loans offered through credit and debit cards, as well as lenders, when paying with Apple Pay.” And finally, the company will allow consumers to use Apple Pay on desktop browsers other than just Safari.
Wall Street appears to be significantly less optimistic about PayPal stock in the wake of Apple’s announcement, as the stock is down about 10%. the week following the news from the software giant.
Not a game changer
I don’t expect Apple’s initiatives to be a game changer for PayPal. First of all, according to one estimate, that of PayPal the market share of online payments was 56% last year while Apple’s was only 12.6%. So even if the changes increased Apple’s market share by 20 percentage points, all at PayPal’s expense, the latter company would lose less than five percentage points of its share.
But I don’t expect this scenario to materialize. Most consumers don’t exchange money with their peers in person, so the Tap to Cash feature probably won’t be very popular. And PayPal has a big advantage over Apple when it comes to exchanging money on desktops. Finally, Apple has partnered with credit card issuers in the past, and PayPal already faces numerous competitors offering online loans, including SoFi (NASDAQ:SOFI) and Zelle. As a result, I don’t expect Apple’s new partnerships with card issuers and lenders to be a negative factor for PayPal.
The bottom line
While I don’t expect PayPal to take a big hit from Apple’s moves, the fintech company could suffer market share losses of a few percentage points, further scaring the street in the process.
Furthermore, due to the negative momentum in PayPal stock, the stock is likely to continue falling for a while longer. As a result, I believe investors will have the opportunity to purchase the stock at significantly less than the current price relatively quickly. That’s why I view the stock as a hold rather than a buy.
As of the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to InvestorPlace.com Guidelines for publication.
Larry Ramer has been researching and writing about US stocks for 15 years. He was employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing articles for InvestorPlace in 2015. His highly successful contrarian picks include SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.