- PayPal stock has sold off after reports emerged that Apple Pay will become available on mobile sites soon.
- PayPal stock tends to sell off whenever rumors about a new Apple payments platform emerge.
- A deeper look at Apple's move reveals that it cannot hurt PayPal as much as some investors fear.
Paypal Holdings (NASDAQ:PYPL) stock has tumbled 6% over the past couple of days after a report emerged that Apple (NASDAQ:AAPL) was prepping to make paying for online transactions via Apple Pay on websites possible. The service will be available to shoppers using Apple’s Safari browser with further reports that Apple could extend the service to laptops and desktops as well. The service will reportedly be available before this year’s holiday shopping season.
There is a good reason why PayPal stock has been selling off. After all, PayPal is a predominantly online payment platform, with just a sliver of its payments volume coming from physical stores. In contrast, up until now Apple Pay has only been available in physical stores with an NFC-enabled terminal. It appears as if Apple is trying to copy many PayPal moves. For instance, Apple recently launched a P2P payment service to compete with PayPal’s Venmo.
P2P, or Person-to-Person, payments is an increasingly popular online technology that lets people transfer funds from their own bank accounts or credit cards to other people’s accounts using a mobile phone or via the Internet. For instance, PayPal reported that Venmo processed transactions worth $2.5B during Q4 2015, up 174% Y/Y. That’s a significant amount because it accounts for 3% of PayPal’s TPV, or Total Payments Volume, of $82B. Apple’s P2P service will be directly incorporated into Apple Pay.
But just how serious is the threat posed to PayPal by Apple Pay becoming available on mobile sites?
Market could be overreacting
For starters, PayPal investors by now are probably aware of how the PayPal stock tends to react strongly to any reports about a new Apple payments service. When Apple Pay was first announced about three years ago, shares of PayPal’s parent eBay (NASDAQ:EBAY), sold off quite heavily. The recent announcement of about Apple’s P2P service led to PayPal stock trading down about 6% despite the fact that though growing fast, Venmo is still a small part of PayPal.
Perhaps Piper Jaffray’s bearish comments have not been doing PayPal stock any favors. Piper’s Gene Munster reiterated his Underweight rating on PayPal stock with a $33 price target (15% below current price) saying that the move by Apple has the potential to disrupt PayPal since at least 20% of PayPal’s TPV in 2015 was done via iPhones/Apple devices.
To be sure, by making Apple Pay available on mobile sites, Apple Pay will probably present a much bigger threat to PayPal than earlier when the service was only available in physical stores. But investors should bear in mind that PayPal is available on all mobile and desktop operating systems and not just iOS. PayPal is a global payments platform that is widely used by merchants and consumers in almost every country in the world. iOS is quite popular in the U.S. and other developed economies where iPhones are prevalent. But on a global basis, Android still rules with 82% market share compared to just 14% for iOS.
These figures throw a spanner into Munster’s claims that 20% of PayPal’s TPV in 2015 came through Apple devices. $20B, or close to 25% of PayPal’s TPV, was done via mobile devices during the fourth quarter. If Munster’s claim of 20% of TPV coming from Apple devices is accurate, then it would imply that 80% of PayPal’s mobile transactions are done via Apple devices. That might be true in the U.S. but on a global scale, it appears highly improbable given the huge market share that Android enjoys over iOS.
Then there is the question of how many merchants would be willing to incorporate Apple Pay into their websites as one of their payment gateways. PayPal works just fine for most merchants as evidenced by the platform’s rapid growth. PayPal is all about serving businesses with 81% of the company’s TPV coming from merchant transactions. Merchant TPV was up 36% during the last quarter, considerably faster than overall TPV growth of 29%. Merchants generally incorporate a new payment platform into their website based on demand by their customers.
The claim that Apple Pay will be easier to use than PayPal for customers making online transactions might not hold much water since PayPal’s One Touch mobile payment solution, a feature that allows users to pay via PayPal without having to re-enter their login or billing/payment information, is already enjoying strong adoption with more than half of the largest online retailers having incorporated it. Apple Pay is still struggling to carve for itself a respectable niche in the world of mobile payments and might not become a major force anytime soon.
In any case, Apple Pay is not the only competition that PayPal has to contend with. American Express (NYSE:AXP) recently launched Amex Express Checkout which works quite similar to PayPal. Amex Checkout should theoretically be a much bigger threat to PayPal since the card network is much more prevalent than Apple Pay. Yet there is no evidence to prove that the new service has interfered with PayPal’s growth in any way.
If Apple Pay somehow manages to make the service available across different mobile and desktop operating systems, then it would have a good fighting chance to disrupt PayPal. But the current scope of the service is rather narrow to be a real threat to PayPal.