Topic: Growth Stocks

Acquisitions should pay off for this online payment specialist

Since being spun off three years ago, this stock has built its own client base through alliances and acquisitions.  

Those deals have increased the e-commerce services the company can offer and helped it expand internationally. Recently it signed a potentially lucrative deal with an online betting site after the U.S. Supreme Court lifted restrictions on sports betting. While the stock trades at a high multiple to future earnings, it stands to benefit from high research spending and strong growth prospects. 


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PAYPAL HOLDINGS INC. (Nasdaq symbol PYPL; www.paypal.com) processes online transactions, including purchases made through eBay’s websites. It was spun off in July 2015 by eBay (Nasdaq symbol EBAY), the owner and operator of e-commerce auction websites.

As a separate firm, PayPal has been free to pursue alliances with more retailers and progressively reduce its reliance on eBay, which is already moving some payments away from PayPal. The contract between the two is due to expire in mid-2020.

In the meantime, PayPal has redesigned its mobile payment app. The changes make it easier for users to send and receive payments, view balances and other information. As well, PayPal users can import photos and contact data. That cuts the risk of sending money to the wrong people.

PayPal continues to grow by acquisition. In May 2018, PayPal bought iZettle AB. Based in Sweden, it makes equipment and software that lets merchants accept credit and debit card payments. It currently has 500,000 clients in Europe, Brazil and Mexico. In the past few years, iZettle has expanded into other services such as analyzing customer transactions and managing loyalty programs.

The new operations will add just $165 million to PayPal’s annual revenue. However, the company can use its much larger client base (20 million merchants) to expand the availability of iZettle’s products and services.

PayPal paid $2.2 billion for iZettle; it completed the purchase in September 2018.

To put that price in context, the company’s revenue in the second quarter of 2018 rose 23.0%, to $3.86 billion from $3.13 billion a year earlier. Earnings before unusual items jumped 29.0%, to $526 million, or $0.44 a share, from $411 million, or $0.34.

Growth Stocks: New acquisition’s clients include Amazon.com and Expedia

In June, the company made two more acquisitions. One was a deal to buy Hyperwallet Systems Inc. That privately held firm makes software that helps merchants and individuals receive payments for goods and services they sell online. Hyperwallet’s clients include Amazon.com’s Australian business and Expedia’s vacation-home rental website. PayPal will pay $400 million for Hyperwallet.

The company will also pay $120 million for Simility, whose software helps e-commerce firms detect and prevent fraudulent transactions. It expects to complete the purchases of Hyperwallet and Simility before the end of the year.

PayPal has also formed a new alliance with DraftKings, an online sports betting website. As a result, DraftKing clients can now use PayPal to make bets and receive payments.

The U.S. Supreme Court recently lifted 26-year-old limits on the U.S. sports betting market. Even so, many banks refuse to process betting transactions made through their credit cards. That gives PayPal an opportunity to take advantage of this rapidly expanding market. For example, the company predicts that online gambling in Canada alone should generate $40 million in annual revenues over the next five years.

PayPal’s growing clientele could make it an attractive takeover target for a big bank or other financial services firm. However, its high market cap tends to limit that appeal.

The stock trades at 38.0 times PayPal’s projected 2018 earnings of $2.28 a share. That’s a high multiple, but still acceptable considering the company’s strong growth prospects. It also spends a high 7% of its revenue on research.

Recommendation in Wall Street Stock Forecaster: PayPal is a buy.

 


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