PayPal Holdings Inc (NASDAQ:PYPL) stock plummeted almost nine percent in early morning trading last Thursday after a report emerged that Apple Inc. (NASDAQ:AAPL) is planning to expand its “Apple Pay” service to web sites. The potential move into online payments puts Apple in direct competition with PayPal. PYPL stock is down is about five percent since the news broke.
Should PYPL shareholders be worried? Let’s find out.
According to Re/code, Apple has been telling potential partners that its mobile payment service, which currently lets users pay for items in stores using their “iPhone,” is expanding to web sites later this year. (Source: “Apple Pay Coming to Mobile Websites Before Holiday Shopping Season,” Re/code, March 23, 2016.)
That means that users will be able to use the “Safari” browser on the iPhone and “iPad” that possess Apple’s “TouchID” fingerprint technology to make purchases on web sites. There are reports that Apple will be expanding the service to laptops and desktops as well, but a timeline was not given. (Source: Ibid.)
So just how serious of a threat is Apple Pay to PayPal?
Investors had every right to sell off PYPL stock last week. After all, PayPal is an online payments platform, an area that it dominates. PayPal holds about a 65% share in the market, so a new entrant into the market as giant as Apple can certainly slice into that number. (Source: “PayPal market share in the Alexa top 1M,” Datanyze, March 29, 2016.)
But the sell-off of PYPL stock might be a bit overblown. Investors should recall that PayPal is a global online payments platform that is widely used by merchants and consumers and available on all devices and operating systems.
Apple Pay, on the other hand, is only available on “iOS.” In the U.S., the iPhone is quite popular, holding 43.6% of the smartphone market, but it’s trailing Android’s lead by a few percentage points. (Source: “Subscriber share held by smartphone operating systems in the United States from January 2012 to January 2016,” Statista, March 30, 2016.)
On a global scale, however, Android dominates with 80.7% of the market, while iOS trails far behind with only 17.7% market share. This could be a limiting factor for Apple on a global scale, while PayPal is available in more than 200 countries with 49% of its revenue generated from outside the U.S. (Source: “PayPal Reports Strong Fourth Quarter and Full Year 2015 Results,” PayPal Holdings Inc, January 27, 2016.)
There’s also the question of merchant adoption. Just because Apple Pay will now be available online doesn’t necessarily mean that online merchants will accept it, especially if they use PayPal already and it works fine. PayPal has the first mover advantage in this space and it’s taking advantage of the network effect. In the last quarter, merchant services total payment volume increased 36% for PayPal over the previous year. (Source: Ibid.)
PayPal is also growing rapidly in other areas like mobile. In the latest quarter, PayPal processed about $20.0 billion in mobile payment volume, up 45% from the previous year. Purchases on a mobile device now account for about 25% of PayPal’s total payment volume. (Source: Ibid.)
PayPal’s acquisition of Venmo is also set to drive growth. Venmo is a social payments app aimed at millennials. The free digital wallets lets users make and share payments with friends by linking to their debit and credit cards online, so they can easily split restaurant tabs or cab fares. In the latest quarter, PayPal revealed that Venmo processed $2.5 billon in transactions, up 174% from the prior year (Source: “PayPal Reports Strong Fourth Quarter and Full Year 2015 Result,” PayPal Holdings Inc, last accessed March 2, 2016.)
Venmo won’t be fully monetized until the end of next year, but Jefferies Group analyst Jason Kupferberg believes that Venmo’s “Pay With Venmo” platform could add between 2.1% and 5.5% to PayPal’s 2017 earnings. (Source: “PayPal (PYPL) Stock Advanced as Jefferies Cheered ‘Pay With Venmo,” TheStreet.com, February 29, 2016.)
The Bottom Line on PYPL Stock
Apple’s move into online payments shouldn’t pose too much of a threat for PayPal, at least not in the short term. On a global scale, Apple Pay will pose even less of a threat since the scope of the service will be very limited. PayPal also has other growth initiatives in the works that should help the company stay on its rapid growth trajectory.