PayPal Holdings Inc(NASDAQ:PYPL) is one of the largest digital payments companies in the world and now it may be teaming up with one of the largest credit card companies in the world. If this deal goes through, it could mean big things for PYPL stock.
Virtually every major online store has PayPal as a checkout option. The company dominates the online payments business, with about a 65% share in the market. (Source: “PayPal Market Share in the Alexa Top 1M,” Datanyze, March 29, 2016.)
But PayPal is looking to expand beyond its core online payments platform business.
Last summer, PayPal acquired the online money transfer company Xoom for about $890 million. Xoom lets people send money and pay bills from the United States to 37 countries, including Brazil, China, India, Mexico, and the Philippines. The payment platform will allow PayPal to grow its userbase while also gaining access to new countries to grow its business where Xoom has a large presence.
The acquisition of Venmo gets PayPal into the social payments app space. The “Venmo” app is aimed at millennials and allows users to make and share payments with friends so they can easily split a restaurant bill or cab fare.
PayPal is also making inroads with mobile payments. The mobile payments market is taking off, and PayPal is positioning itself to become the market leader. In the company’s latest quarter, the company processed about $20.0 billion in mobile payments volume, which is up 45% from the previous year.
Now it looks like PayPal is trying to expand beyond the digital world.
According to investment bank SunTrust, PayPal and Visa Inc (NYSE:V) are apparently in talks about partnering up. (Source: “PayPal, Visa Could Be In Talks About A Possible Partnership: Analyst,” Investor’s Business Daily, April 13, 2016.)
What does this mean for PayPal?
PayPal customers currently pay for their purchases online by linking their bank account or paying directly through PayPal. If a deal is struck with Visa, adding a credit card to the list of payment options that PayPal offers could significantly boost PYPL stock’s growth potential.
A Visa card payment option could significantly reduce PayPal’s transaction expenses. In 2015, the company’s transaction expenses bit into about 28% of revenue. The deal could also bring in additional PayPal customers who would rather use a credit card to pay for things they buy online.
However, SunTrust analyst Robert Peck wrote in a research note that the deal could bring in an additional $300.0 million in transaction expenses.
As Peck writes, to offset the increased expense, PayPal “would have to either negotiate for some kind of expense offset, see a seven percent lift in payment volume funded by credit cards, or see a three percent lift in volume from its cheapest funding sources.” (Source: Ibid.)
Peck is also bullish on PYPL stock regardless if a deal is reached or not. Peck raised his price target on the stock from $38.00 to $44.00 and maintained his “Buy” rating, citing “better market conditions.” (Source: Ibid.)
The Bottom Line on PYPL Stock
PayPal stock has struggled a bit over the past year, up only about five percent. It still remains to be seen if an agreement will be made between PayPal and Visa. If the two payment processing giants do team up, PYPL stock could get a big lift.