PayPal
PayPal Holdings Inc. is in a far different place than it was two years ago at its first analyst day, but its story remains controversial.
Last time around, PayPal had been a standalone company for about a year but its stock had gone nowhere amid worries about competition from the big banks and financial networks. By now, PayPal has put those doubts to rest and its shares have rocketed higher, but there’s concern on Wall Street about whether the company can find enough new growth avenues to justify its lofty price.
“This investor day, we expect PayPal to articulate how the company has evolved in its transformation as an open platform, and more importantly how it’s differentiating the core button (and creating a sustainable competitive moat),” Bernstein analyst Harshita Rawat wrote.
Here are six key things to watch for at PayPal’s analyst day on Thursday in San Francisco.
Plans for iZettle
PayPal announced last week that it would be enhancing its omnichannel-commerce capabilities through a $2.2 billion purchase of iZettle, but the company was vague on its plans for the new acquisition. IZettle enables small businesses in Europe and Latin America to accept card-based payments. A key question is whether PayPal intends to eventually bring iZettle to the U.S. and more directly compete with Square Inc. , First Data Corp. and others, or if the company sees iZettle as an opportunity to gain a broader foothold in regions where its core business isn’t as strong.
“There were some mixed views related to the price paid for iZettle, with investors worrying about the potential to overpay as PayPal embarks on a buying spree,” Credit Suisse analyst Paul Condra wrote in an analyst-day preview. “We remain positive on the deal as it signals management’s focus on acquiring innovative customer acquisition channels.”
The rest of PayPal’s cash
The $2.2 billion PayPal plans to spend on iZettle represents just a fraction of the company’s overall cash, and Wall Street will be looking for more information about what management plans to do with the rest. Some analysts expect further deal activity.
“PayPal will likely have greater than $15 billion cash on its balance sheet post the credit divestiture in 3Q – making a strategic acquisition more timely versus history (against a backdrop of increased deal activity within payments over the last year),” Rawat wrote. Management has expressed an openness to deals that help the company expand geographically or add a new capability.
Others have broader questions around capital allocation. Baird’s Colin Sebastian asked: “Considering the pending acquisition of iZettle, how does the company plan to allocate capital among buybacks/dividends, strategic investments and additional acquisitions?”
Post-eBay opportunities
PayPal’s stock sold off when eBay Inc. said earlier this year that it would be moving PayPal to a more diminished role, and investors will be looking for more details about how the company plans to manage this changing relationship. One aspect of that involves modeling eBay’s contribution to the financials a few years out, and management has already said that eBay revenue accounts for a shrinking portion of overall revenue.
Also of interest will be any new information the company provides on its attempts to turn a negative into a positive. “PayPal management has commented that after June 2020 (the end of the original operating agreement with eBay), PayPal would be free to pursue partnerships with eBay competitors,” wrote Susquehanna analyst Jamie Friedman. “This is not currently permitted under the PayPal/eBay operating agreement.”
Areas to explore or enhance, according to Friedman, include Amazon.com Inc. , Walmart Inc. , Alibaba Group Holding Inc. and eBay India, which is separate from eBay.
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New markets
Nearly all financial-technology companies are evaluating the best ways to build a presence in fast-growing regions. Baird’s Sebastian wants to know more about the company’s “plan to gain share in the fastest-growth payment markets” including “India, China, Latin America and Southeast Asia.”
PayPal’s strategy for much of its time as an independent company has been to partner with established players, and it will likely follow a similar route internationally. The company recently announced a partnership with a Kenyan mobile-payments company and also has relationships with Baidu Inc. and Alibaba in China. Look for more detail on those efforts and their financial payoffs.
“While we are seeing benefits in PayPal’s reported numbers (net new user adds, TPV growth), we are watching for further color on how some of these partnerships (e.g. with Chase, Baidu, Barclays, Google, Samsung) will impact the numbers and on what time frame,” Bernstein’s Rawat wrote of PayPal’s partnerships in general.
Making money off of Venmo
Part of the bull case for PayPal is the company’s efforts to finally monetize its loyal Venmo user base. That involves getting Venmo users to pay for e-commerce items using the service or fork over a few cents to access funds in their accounts more quickly. While PayPal has hinted that the instant-deposit payments have proven successful, investors will be looking for more information on Thursday as to how that first part, dubbed Pay with Venmo, is playing out.
On Pay with Venmo, Rawat is “particularly looking for visibility into when we will start seeing the impact on [total payment volume] growth.”
As for other new ventures, notable will be any discussion of how new products for underbanked customers — including a physical debit card — could affect financials.
The next few years
Analysts are hoping for updates on the company’s “medium-term” financial targets, given that PayPal has met or exceeded the goals it set forth during its 2016 analyst day.
Rawat will be watching for new information, but she’s doubtful that PayPal will provide it. “We believe it is unlikely that PayPal updates its medium-term guidance — especially in the face of the eBay roll-off (which the company has indicated will be a mid-single digit earnings headwind,” she wrote. “We believe it is a double-digit headwind) and credit divestiture (we believe good for the business but earnings dilutive in 2H18 and 1H19).”