Advertisement

Paypal is poised for major growth in the buy now, pay later landscape: analyst

Bank of America Analyst Jason Kupferberg joins Yahoo Finance Live to discuss the growth outlook for Paypal.

Video transcript

[MUSIC PLAYING]

- Welcome back to Yahoo! Finance Live. With the continuing focus on the debt ceiling and potential fallout if it isn't raised, it's likely the payment space will come into focus among investors again. Space continues to be dominated by PayPal, which is coming off announcing the sizable acquisition of Japan's Paidy. Bank of America analyst, Jason Kupferberg, covers PayPal and joins us now. Jason, good to see you this morning. Take us through the bull case on PayPal.

- I would say the bull case is multifaceted for PayPal. What I would start with is the scarcity value of this asset. If you are a believer in the global, long term, secular theme of e-commerce and mobile payments, there's simply no better way to play that theme in US equities and the payment space than with PayPal. They are uniquely positioned, with a massive two sided network now approaching a total of 400 million active consumers globally, which are split roughly half and half in the US and internationally. And they're also showing terrific traction with a lot of their newer growth initiatives, which I'd be happy to discuss further, as well.

- Yeah, Jason, on the topic of these growth initiatives, which do you think is perhaps the biggest priority here for PayPal, or the one that the company should really be leaning into when we think about the potential opportunity here in this space?

- I would say it's buy now, pay later, or BNPL, for sure, which you've probably been hearing a lot more about. And PayPal is in the fortunate position to be able to enter the buy now pay later market organically. Because of that massive two sided network that I mentioned earlier, they already have this vast network of both consumers and merchants. They can light up this new functionality among their 30 million merchants and give access to it to their 350 million plus consumers around the world. And what we've seen, so far, is some tremendous growth in buy now pay later which PayPal calls pay in four, reflecting the fact that you pay four equal installments over a six week period with 0% interest. And that payment volume for that business, alone, grew 49% quarter over quarter in Q2.

- Jason, how big of a component is Paypal's push into the crypto space in your modeling?

- So we are bullish on their entry into the crypto space. And I would put crypto on kind of their short list of some of these newer, organic growth initiatives that I mentioned earlier, that over a multi-year period we think can start to move the needle. And, really, their approach here includes a couple of aspects. One is the ability to buy, sell, and hold crypto on the PayPal platform. That's now been rolled out for Venmo users, as well. In addition, the ability to pay with crypto. In other words, use your stored balance of cryptocurrency to fund purchases anywhere that PayPal is accepted. And that is a service that is unique to PayPal. And so we think that they're making the right moves in terms of how they are having their business model intersect with the crypto economy.

- When you think about competition in the space-- of course Square is perhaps the biggest competitor that comes to mind here in the US for PayPal. So how do you think of these two different companies both offering peer to peer payments platforms, PayPal with Venmo, Square with Cash App. And how do you think about their competitive advantage, especially as it relates to acquiring and then retaining those users?

- So I would agree that, particularly in the US, if we look at PayPal/Venmo and then we compare that to the Cash App business, specifically at Square, which is their consumer facing business, there's definitely a lot of similarities from a functionality perspective. PayPal certainly has a advantage over Square in terms of a much, much more significant international presence, but both of them are pursuing this strategy of being more and more of a one stop shop, if you will, for consumer financial services. And, obviously, that was part of the reason why Square recently announced their planned acquisition of Afterpay, which is another of the buy now pay later providers in the market.

- How large of a threat would an Amazon point of sale system be for a PayPal?

- Probably not much. PayPal really doesn't have a significant presence in the physical retail market. They are making a bigger push in that regard with a QR code based solution, which is growing nicely off of a very small base. But the vast majority of Paypal's business is online. So if there were to be a new physical point of sale system from Amazon then we would think of that as certainly being more potentially threatening to a company like Square, let's say, relative to PayPal.

- And in terms of the modern day PayPal, it really has been led and shaped by CEO Dan Schulman. He's been CEO for over seven years. Regarded as probably one of the best CEOs in corporate America. And certainly seven years is a long time for a tech company's CEO. How much longer do you think he will stay in the job, and what does the talent under him look like?

- I wouldn't speculate, specifically, on how long he may stay in the seat. He is more active and engaged than ever. I can tell you that from personal experience. Certainly showing no signs whatsoever of slowing down. I would say that the bench of talent is extremely strong at PayPal. We saw that showcased, actually, at their analyst and investor day back in February, where we were really exposed to the next layer of management and heard a lot more about these newer, exciting growth initiatives. So regardless of how long he may choose to stay, I think the leadership team will remain very sound at PayPal.

- In terms of the near-term growth prospects for PayPal-- Of course, we had the company and Venmo, especially, see such a massive run up during the pandemic. We just saw in the latest quarter, Venmo processing $58 billion in total payments volume, growing 58%. What are your expectations when we think about the back half of the year. Now, especially that we have some of these stimulus payments slowing down on the consumer front, some of the spending slowing down in terms of this economic backdrop.

- We expect that Paypal's growth both near-term and medium term will remain quite robust, especially for the core business, which would exclude the eBay relationship, which is in the process of seeing a partial deconversion off of the PayPal platform. So we're looking for upwards of 35% overall payment volume growth this year, and the company has guided for around mid 20s on a five year CAGR basis going forward. We think that could even potentially be conservative because we do expect to continue to see e-commerce taking a bigger share of overall spending. So quarter to quarter, naturally there'll be fluctuations in growth rates, there are tougher year over year comparisons, there are dynamics such as stimulus payments, but we think that the ubiquity of PayPal will continue to serve the company very well as they execute against their multiyear growth agenda.

- And then outside of the US, where do you see the biggest international opportunity right now for PayPal?

- I think there's multiple layers of international opportunity for PayPal. I would say Latin America, for example, which is relatively under-penetrated from an electronic payments and an e-commerce perspective. We just saw the Japanese market be highlighted via the recent Paidy acquisition. Japan is actually the world's third largest e-commerce market, and PayPal certainly taking an opportunity to expand their penetration there, as well. So those are a couple of regions that I would highlight, specifically.

- Jason, real quickly before we let you go. Do you have an estimate on how much Venmo is worth inside of PayPal?

- We have not published a specific estimate of that. What we can say is that this year the company is on track to generate over $900 million of revenue from Venmo. And certainly we would expect there to be a pretty high growth rate on the back of that. They continue to develop more and more monetization engines for the Venmo asset. There was recently, for example, the Venmo credit card was introduced to complement the debit card that already exists. And we've also seen the Venmo business profile service be launched, as well. So we do see both of those as being catalysts for, certainly, growth that will be well above the corporate average for the foreseeable future.

- Fair enough. Bank of America analyst, Jason Kupferberg, laying out the bull case on shares of PayPal. Have a great rest of the week.