- PayPal shares have performed poorly post spinoff.
- This can be partly chalked up to a sluggish market, and partly because not much exciting news has been forthcoming from the company.
- PayPal, however, has significant growth drivers in the form of Braintree and OneTouch that will drive long-term gains for the shares.
Shares of payment processing company PayPal (NASDAQ: PYPL), have remained depressed since the company split from parent company eBay (NASDAQ:EBAY). PayPal stock has lost about 10% since the spinoff mainly due to a sluggish market and lack of any positive drivers for the company. PayPal stock closed at $34.25, on 21st September, up 4.04%.
Source: CNN Money
But I believe the market has been glossing over some important PayPal developments, probably because there is a lack of precedence of a company like it to which it can be compared directly against. PayPal, however, is not short of significant growth drivers.
Braintree Firing PayPal Growth
It’s beginning to appear like eBay, for all its failures, was blessed with a knack for picking up big winners. PayPal is of course eBay’s biggest homerun, a company that it acquired for just $1.2 billion in 2002 but was valued at more than $46 billion 13 years later. The online auction giant also acquired Braintree, a global payments company that also processes mobile transactions, about two years ago for $800, which at the time looked like nothing more than another futile attempt to revive its dwindling fortunes.
But it’s now looking like Braintree was another eBay homerun, only that it’s PayPal, not eBay, that will reap the dividends. When eBay acquired Braintree, the company was doing about $12 billion in annual transactions, including $4 billion in mobile transactions. Meanwhile, Braintree had 56.5 million cards on file.
Fast forward to 2015. Braintree has managed to more than quadruple its transaction volume, and is on track to surpass $50 billion in transactions by year-end. Meanwhile, Braintree’s cards on file have almost tripled to 154 million. On the other hand, PayPal has about 170 million active accounts on its books.
Assuming Braintree enjoys a take rate somewhere in the ballpark of PayPal’s 3.4%, then the platform is on course to bring in about $1.7 billion in revenue for PayPal, or about 20% of PayPal’s top line. One of the reasons why Braintree has been a resounding success is because eBay integrated it directly into PayPal’s platform thus allowing many PayPal users who had hitherto not heard about the payment platform to do so and easily sign up. Braintree says that part of its success has been driven by its close collaboration with ecommerce platforms such as Bigcommerce which has more than 90,000 merchants. Braintree also points to its OneTouch tool as being responsible for firing its rapid growth. And that brings us to our second growth driver for PayPal.
OneTouch will Enhance PayPal adoption
Although PayPal’s 160 million active accounts looks impressive, the company still has plenty of room to run to bridge the gap with popular payment platforms such as Amazon, with more than 240 million active accounts to its name, not mentioning Apple (NASDAQ: AAPL) with more than 800 million iTune accounts.
PayPal now has one hot product that could be just the thing to increase merchant adoption--Braintree’s OneTouch. The One Touch program allows PayPal users who opt into the service to make a payment without having to re-enter their billing and shipping information into websites and apps that support PayPal. While that doesn’t sound like such a big deal, consider that the biggest cause of shopping cart abandonment is an overly complex checkout process. Shopping cart abandonment is the practice whereby people abort an online shopping process before completion. Shopping cart abandonment is a really big problem in mobile shopping since it runs as high as 98%--in other words, only 2% of people complete their mobile shopping once they begin the process. Shopping cart abandonment for online transactions done via desktops is lower but still quite high--72%. PayPal says that OneTouch has been demonstrated to increase conversion rates by a whopping 50% or more in markets where it has been established. That’s a powerful selling proposition.
It’s obviously in the interest of merchants to minimize incidences of shopping cart abandonment and increase their conversion rates. And this is exactly what OneTouch does by allowing users to stay logged in across different applications. OneTouch competes directly against services such as Stripe, which is popular with Shopify, Rackspace, Dailymotion, Foursquare, and Reddit. OneTouch’s big advantage, however, is the huge footprint it has already established with merchants as a highly reliable online payment gateway.
The success of OneTouch has encouraged PayPal to rollout the service to 13 new major markets in Europe and Australia. PayPal merchants in these regions will find the tool automatically enabled on their PayPal accounts. OneTouch is an innovative product that has the potential to make PayPal more popular with merchants by increasing their conversion rates. OneTouch is now available in 16 countries, and will no doubt create waves when it’s finally made available in the more than 200 countries that PayPal serves.
PayPal has good growth runways despite its shares having been sluggish post spinoff. It’s only a matter of time before company’s new platforms and tools such as Braintree and OneTouch truly take off, at which point the shares will hit fresh highs.