In the financial media, eBay’s decision to break with Paypal as the main payment processor in its online trading platform has been highlighted as important news. This news is related to the fall of the Paypal shares this month.
It is interesting to take a look at the data and implications that this decision has. The first thing is that this will not be effective until 2020, when the post-separation agreement of both companies ends. Paypal grew and developed under the irruption of eBay, which acquired the platform in the early 2000s. In the beginning, most of the volume of payments processed by Paypal was related to the transactions that were made on eBay. Since then, Paypal’s growth has been stronger than that of the online trading platform , which motivated the decision to separate both businesses and deliver Paypal in a new company listed to eBay shareholders themselves in 2015.
It is clear that the decision of eBay could affect the number of transactions that are made through Paypal, although we must not forget that this option will still be present. What changes is that it will not be the first alternative means of payment that is offered to users. Therefore, it does not seem reasonable to think that the volume of payments processed by Paypal on eBay will fall to zero, in fact, many of the customers and sellers on the platform will continue to use Paypal due to the large network effect it has.
How much is the volume of eBay transactions in the total payments processed by Paypal today? According to eBay, the total volume of transactions in its platform reached $88.4 billion in 2017. Likewise, Paypal claims that it processed a total of $451 billion in payments in the same year. If all eBay transactions are made through Paypal, then the weight of eBay in Paypal accounts would be 19.6%.
This is an extreme assumption, since most of the transactions on eBay are probably made through other means of payment, such as credit cards or bank transfers. That is, eBay in the Paypal business represents less than that 19% that we have calculated. In addition, it is very likely that the volume of payments processed on eBay through Paypal leave a lower percentage of commissions than in other types of transactions due to the preferential agreement, so that the impact on the final result of Paypal would be even lower.
Additionally, this measure will be adopted in 2020. While the volume of payments processed by Paypal grows around 25% per year, the volume of payments processed by Paypal on eBay grows to 7%. Two years later the impact of eBay on Paypal will be even lower. If we count that part of the users will continue to opt for Paypal on eBay, the total impact on the Paypal business does not seem too relevant. By gauging all these details a bit, we can conclude that the impact of eBay’s decision on Paypal would affect less than 5% of the company’s profit, always understanding that it is not an accurate approximation.
There’s still more. The break with eBay can help Paypal accelerate the number of deals with many distributors of all kinds. Paypal’s main gain from its separation from Ebay has been its neutrality as a payment platform. Previously, many distributors and direct competitors of Ebay viewed with distrust the direct agreements with Paypal, since this was the property of its rival. After their separation, Paypal has signed dozens of agreements with all types of distributors and companies to include in their platforms the possibility of Paypal payment.
Here is an incomplete list of agreements signed in recent years: Apple, Facebook, American Mobile, Vodafone, AliBaba, Android Pay, Discover, Wells Fargo, HSBC, JPMorgan, Citigroup, Pinterest, Skype (Microsoft), Banorte, Shinhan Card , H & M, Yandex, Costco Mexico, Ikea, Carnival Cruise Line, Cathay Pacific, West Elm, Pottery Barn, Willians-Sonoma, Walt Disney Company, Dillars or QVC Group.
In the list I have not included the important agreements signed with Visa or Mastercard to develop mobile payment without a card, as well as a deeper relationship standard. These are well-known names, but do not forget the 18 million merchants or sellers from all over the world who accept Paypal as a means of payment. 3 years ago, the figure was 15 million for us to get an idea of the progression of the platform.
In short, focusing too much on the current relationship of Paypal with eBay is losing the great perspective, and that is that Paypal has much greater potential outside of eBay as a payment platform. It does not seem that this news is too relevant for the investor’s expectations, especially if it has not been discounting a perfect future. In my case, I established the long-term 15% annual revenue growth potential in the investment thesis for Value Portfolio subscribers , which made this value a great investment idea at around $36 per share.
In previous years, Paypal’s revenue growth exceeded 15%, however, in recent quarters growth has accelerated with great force, reaching 26% in the last quarter. This is a good reason for the price to continue rising. The correction from $85 to recent close of $77.7 can not be considered a significant reaction to any news because after gaining 100% in a year there will be setbacks like these. The news of the breakdown of eBay with Paypal worked more as a trigger for a correction, and not so much a compelling reason to worry.