Hedge fund manager Dan Loeb had a new shareholder letter out Tuesday.
In it, he writes that he’s optimistic about a spun-out PayPal — even though everyone is going nuts over Apple Pay.
Here’s what he said:
PayPal is a high‐growth business with significant opportunities to expand its existing market and margins while pursuing new paths in financial services for consumers and merchants. With significant scale and an attractive funding mix, PayPal generates high incremental margins on payment volume increases which it can use to fund sustained growth.
Apple’s entry into the payments space dampened investors’ enthusiasm for PayPal, creating an interesting entry point. We think the market is missing the fact that ApplePay is primarily an offline mobile solution focused on the Point of Sale (POS) opportunity which represents a small fraction of PayPal’s current business. When we break down the applicability of ApplePay to PayPal’s business mix, we find that ApplyPay will compete directly with only 1.5‐2% of PayPal’s total payment volume (TPV).
We believe that Apple’s entry into the mobile payments space could ironically be a net positive for PayPal. Mobile payments have been “the next big thing” for almost five year but have failed to ramp. In part, this is because one needs buy‐in from financial institutions, merchants, and consumers in order for a payment technology to gain acceptance. With no pressure to catalyze a decision, the different incentives of these groups have not proven to be sufficiently aligned to overcome their inertia and come to an agreement. MCX, Google, and PayPal now need partners to compete with Apple and we think multiple win/win deals exist. PayPal’s current POS business is de minimis, allowing the company to price disruptively while creating substantial value.
Finally, PayPal’s value will be better reflected in a smaller, more nimble entity. PayPal has the option to go‐it‐alone, sell to one of many potentially interested parties, or to open itself up to partnerships with other key online players (e.g. Google, Facebook, Amazon, Alibaba, Apple) and become a neutral, online payments network (essentially becoming “the Visa of the Internet”). The market is currently valuing PayPal at approximately 11.5x‐14.5x x 2015 EPS (assuming an 8‐9x EBITDA multiple for eBay) which seems too cheap for a company growing sales 20% with significant strategic optionality and a strong chance to shape the future of payments.
Loeb’s take on PayPal runs counter to a lot of what we’ve been hearing from payments industry sources. They tell us they expect merchants to begin accepting payments from brands like Google, Amazon, and Apple — and that consumers will fund their accounts with those services directly with their credit cards. That would leave PayPal out of the equation. Meanwhile, the conventional wisdom in the industry is that developers building apps that accept payments (stuff like Uber or Airbnb) prefer using software tools from a payment company called Stripe.
Update: Payments company Braintree has been in touch to point out that Uber and AirBnB don’t use Stripe – but Braintree. We’re happy to clarify.