PayPal sits pretty for its slice of the online action
Published 21/09/2015 | 02:30
Good investors keep pace with the technological changes but you don't have to go back very far to discover that even being 'state-of-the-art' frame of mind cannot protect you from bad mistakes. After all it's only a decade and a half since the 'Dot Com Bust' when the smartest punters in the business lost their well-tailored shirts.
Personally being 'state-of-the-ark,' I'd be reluctant to launch into something I simply don't understand. However the size of the sector is now so immense that no investor will be taken seriously unless he/she can see the merits of say, Splunk, Fire Eye or Palo Alto Networks.
The high-tech company we are examining this week is a veteran of the sector: Pay Pal, around for some 18 years, and only recently spun-off from eBay. The sheer numbers that surround Pay Pal make it compelling. Essentially it enables business and consumers to securely send and receive payments online, including on mobile phones. It builds on the existing financial structures of bank accounts and credit cards, creating a global payments solution. Today it facilitates one in every six dollars spent on line and has become the defacto standard.
Founded in 1998 by a security analyst and hedge fund manager, what we now know as Pay Pal was very much linked to the growth of eBay and was used in a quarter of all eBay transactions. Such was the inter-dependence of the two groups, it surprised few that in 2002, a year after its floatation and only four years after its foundation, eBay bought Pay Pal for $1.5bn. It quickly became the fastest-growing part of the eBay Corporation, and prior to the recent break-up processed $200bn in volume of payments and trades in over 200 countries and in 30 different currencies.
The company has gone beyond being a payment processor on the internet. It handles mobile payments for apps like Uber and room rental site Airbnb, helped by its takeover of small payments provider Braintree. It also has been active in acquisition of companies in key areas. It acquired Bill Me Later, a loan offering operation; Venmo, a person-to-person payment company; and recently Xoom, an acquisition it hopes will accelerate entry into the $600bn global remittance market. Today the company has a market value of $40bn.
The marriage with eBay ended this year. For some time the company has been involved in a verbal spat with activist shareholder Carl Icahn in response to his demand that the company be split. After initially rejecting Icahn's proposal eBay capitulated, while couching its retreat with the usual management guff of "the need for better focus" and "a changing global landscape". Icahn's reply was they had reached the same conclusions as himself - only later.
Over the last three years Pay Pal's revenue growth has moved from $5.6bn to $8bn last year. Free cash flow increased 70pc in the same period to $1.7bn. The share price on re-listing opened at $36 and has broken through the $40 barrier before settling back slightly below the flotation price. The company has no debt, but has signaled capital expenditure is planned at 8/10pc of revenue. Interestingly it is stating that funding growth is a priority in preference to share buybacks. Guidance for this year is for revenue growth of 15/18pc pushing sales north of $9bn and a target of $11bn for 2016.
While the company operates in a competitive landscape it has a strong brand, is market leader with 10pc of the $20trn digital payments market and is well positioned to gain from the shift to mobile phone payments. This share could overcome my tech reluctance but I am very uneasy with the valuations in this sector. Uber, a taxi hailing app, has a market value greater than Avis. A similar Chinese start-up company Quaidi is valued at a staggering $15bn. The room service app, Airbnb has a market value greater than Hilton Hotels. As mentioned earlier those of us who lived through the 'Dot Com Bust' may choose to sit this one out. In addition it is hard investing in US equities with lofty valuations and strong dollar.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.