Fund confident in PayPal
Activist investor Dan Loeb’s fund, Third Point Partners LP, said in its 3Q investor letter that it had established a significant position in eBay Inc (EBAY) during the third quarter. It believes the spinoff of eBay’s unit PayPal will be beneficial for investors. Third Point’s letter said, “PayPal is a high-growth business” and it “generates high incremental margins on payment volume increases which it can use to fund sustained growth.”
Apply Pay could be positive for PayPal
The fund acknowledged that the entry of Apple Inc. (AAPL) into the payment space led to concerns among eBay’s investors about the future of PayPal. But the fund said, “Apple Pay is primarily an offline mobile solution focused on the Point of Sale (or POS) opportunity which represents a small fraction of PayPal’s current business. It added, “when we break down the applicability of Apple Pay to PayPal’s business mix, we find that Apply Pay will compete directly with only 1.5 to 2% of PayPal’s total payment volume (or TPV).”
The fund said Apple’s entry could be positive for PayPal as current players Merchant Customer Exchange (or MCX), Google Inc (GOOG) and PayPal itself would need to forge partnerships to compete with Apple. And this would lead to “multiple win/win deals.” MCX is a company formed by leading merchants such as Wal-Mart, Target, CVS, Lowe’s, Bed, Bath & Beyond, Sears, and Best Buy. It aims to develop a customer-centric and secure mobile payment solution. Its payment platform, dubbed CurrentC, is expected to see regional and national rollout in 2015.
PayPal’s is currently cheaply valued by the market
The fund noted that since PayPal’s POS business is minor, it can “price disruptively while creating substantial value.” It believes PayPal could be a standalone operator, explore a sale to interested parties, or look at partnerships with other key online players such as Google, Facebook Inc (FB), Amazon, Alibaba, and Apple, and “become a neutral, online payments network.” It added that PayPal is “currently cheap” at a valuation “of approximately 11.5x‐14.5x x 2015 EPS (assuming an 8‐9x EBITDA multiple for eBay).”
For more on PayPal and eBay read the latest earnings series, Must-know: Challenges facing eBay in 3Q14.
The next part of this series will look at Third Point’s investment in Alibaba.