Value Trap. Hi everyone. The appraisal of PayPal¡¯s stock is one of the big debates among value investors. Are the shares an attractive opportunity after tumbling more than 80% over the past three years?
At first blush, it looks promising on the numbers. Unlike other software companies within the high-flyer pandemic cohort, PayPal generates billions in annual profits. PayPal stock isn¡¯t expensive either, trading at roughly ten times forward price-to-earnings, compared to its five-year average of 31 times.
But the key question for investors is always about the future. PayPal¡¯s annual revenue growth rate has slowed from 15% to 20% in recent years to just single digits. Will PayPal reaccelerate
or falter? I¡¯m pessimistic for one reason: the rise of Apple Pay.
And I¡¯m not the only one. On Tuesday, Mizuho analyst Dan Dolev PayPal stock to Neutral from Buy. ¡°Our data suggests that market share loss to Apple Pay looks increasingly challenging,¡± he wrote. The iPhone ¡°is driving a secular change in consumer checkout habits¡± toward Apple Pay.
Dolev analyzed PayPal¡¯s checkout button, which accounts for 80% of the company¡¯s transaction profits. Since mid-2021, he found ¡°steep declines¡± in monthly web traffic
share redirected to PayPal¡¯s web domain¡ªa proxy for transactions¡ªat 24 of PayPal¡¯s largest e-commerce checkout partners. It hasn¡¯t improved in recent months.
PayPal didn¡¯t respond to a request for comment on Mizuho¡¯s analysis.
I¡¯ve experienced the behavioral change myself. For years, PayPal was my primary digital wallet for non-Amazon purchases. But I haven¡¯t used it over the past year and have completely shifted to Apple Pay.
Once an iPhone user starts using the service after entering their credit card information, there¡¯s little reason to try anything else. The double tap of the iPhone power button and the authentication with Face ID is too convenient, reducing the
friction to complete orders on apps and the web, and inside physical stores. PayPal, without its own consumer hardware, just can¡¯t offer a similarly seamless experience.
To be sure, Apple¡¯s dominance in payments could become of interest to the government. But even if regulators force Apple to open its payment chip technology, allowing other providers to use the iPhone¡¯s proximity-based mobile payment system, I don¡¯t see much changing. Most consumers won¡¯t go through the trouble of changing their settings when Apple Pay works just fine.
It¡¯s a big turnaround for Apple Pay. The service was released in 2014 to much fanfare but initially didn¡¯t take off. Ultimately, though, Apple¡¯s installed base of over 2 billion active devices was
too compelling for businesses to ignore. Over time, Apple Pay earned acceptance at more retail locations and online stores, putting Apple on the cusp of achieving one of its many goals: disrupting the payments industry.
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