PayPal Ready To Move Ahead In E-Commerce

• A spinoff from eBay on Friday, July 17 will allow PayPal to more freely pursue forward-looking acquisitions.
• The rapid growth and widespread use of Venmo among a younger audience will promote brand trust and recognition.
• PayPal to be a major player in emerging mobile payment market.
• Xoom to compete with Western Union for future global remittance market share.

PayPal (Pending:PYPL) is set to spin off from parent company eBay (NASDAQ:EBAY) on Friday, July 17, and operate as its own standalone company. With PayPal’s operations no longer tied to the slowing eBay segments, we feel the door will be fully opened to many future opportunities in the thriving e-commerce industry for PYPL. The company has proven to execute on acquisitions in the past, such as Venmo, and we expect this trend to continue. A strong balance sheet and confirmation of an aggressive approach to acquisitions from management and CEO Dan Schulman promises substantial growth to come.

The successful and timely acquisition of Braintree in September 2013 brings optimism to the newly acquired global remittance company Xoom (NASDAQ:XOOM), as well as the prospect of future additions. Venmo’s expansive growth in 2014 reveals managements ability to recognize and act upon growth opportunities early.

eBay’s acquisition of Braintree and Venmo, Braintree’s mobile payments solution, will prove crucial moving forward as its social integration with finance strategically appeals to a younger audience. Although the actual amount of dollars transferred on transactions from this service remains subdued for that reason, it’s the relationship the brand is building that we feel is of more importance. We feel a growing and younger user base, not transaction amounts and sales, is more indicative of opportunities for growth in all digital PayPal segments moving forward.

This chart from Business Insider supports PayPal’s growth from operations and acquisitions outside of eBay. While we expect a steady stream of revenue from eBay to continue, it is the opportunities outside of the parent company that offer the most upside.

Mobile payments look set to be the future, or at least an integral part of point of sale transactions. The industry is off to a rather slow start as many consumers likely don’t yet feel comfortable to be among the first to cash out with their mobile devices at the register. For this reason, we feel competitors like Apple Pay and Android Pay will actually help as catalysts in unlocking the multi-billion dollar industry.

Available on Google Play and the App Store, Paypal Mobile Pay will have the chance to compete on nearly all phones for share of the mobile pay market. And with Venmo, Paypal looks to be among the early leaders in this industry, especially in the college market. With management’s emphasis on building trust and transparency with no things like hidden fees, we believe many younger to middle age users will seamlessly transition between any of Paypal’s offered services. Though Apple Pay and Android Pay will likely capture a large part of the mobile pay market given its mobile dominance, just 5% of the projected near $100 billion mobile pay market would roughly double Paypal’s current revenues.

On a side note — it will be interesting to see how Papa John’s payment experiment directly with the mobile app Venmo is received. Papa John’s new “PayShare” allows consumers to pay directly with their Venmo credentials. In a society seemingly always looking for the next social fad, Venmo’s entrance into point of sale transactions should not yet be overlooked.

As with Venmo, Xoom confirms management’s active search for strategic acquisitions best suited for changing market conditions. We believe its largest competitor Western Union (NYSE:WU) will lose a large part if its market share to Xoom in the coming years. We feel Western Union’s higher rates and physical customer-facing centers will soon be out dated and put Xoom ahead of the curve as they continue to optimize their margins in the digital sector. Paypal’s established and trusted brand name will help many make the initial switch to the newly acquired company, while cheaper fees for almost every transfer will retain the new customers.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PYPL over the next 72 hours. (More…)