Hager: A Play on PayPal
04/08/2005 12:00 am EST
While many advisors and investors debate the future of E-bay, Fred Hager and research analyst Rick Currin, offer an intriguing perspective and see the real opportunity in one of the firm’s operations – its PayPal system. Here, they explain their bullishness.
"As the eBay (EBAY NASDAQ) online auction megasite matures, investors are somewhat split on what lies ahead for the company. Detractors cite a slowing of its domestic growth, yet another rebellion among sellers facing higher fees, and mounting cost pressures in the online advertising world. In reality, for every seller that finds the road too tough, there is another waiting in the wings to benefit from one less competitor in the mall. The surviving seller benefits from even more volume and higher profit margin. And so will eBay.
"In our view, eBay 'gets' what some of its sellers haven’t yet. More volume at higher profit margins is a formula for success.Even a site as sprawling as eBay has a supply/demand dynamic. Too many vendors in the mall with the same product will ultimately impact the cost of goods. But eBay has a plan to benefit more generally from the proliferation of internet selling whether that selling occurs on eBay or off eBay. That strategy is PayPal. And in our view, it's the PayPal strategy that places eBay in the position of emerging as the biggest success in e-commerce.
"The PayPal system is creating the new global standard for online payments. PayPal The true beauty of PayPal is that it allows anyone with a computer to receive payments from anyone else with a computer. PayPal drastically reduces the cycle time of cash received compared to checks and money orders. It also reduces the merchants’ exposure to fraud. PayPal has already become the preferred method of Payment throughout the eBay network boasting an impressive 48% of the total gross merchandise transaction volume seen through eBay. Transaction volume has grown from $4 billion in 2002 to a whopping $10.6 billion in 2004.
"For some perspective on its pervasiveness, PayPal is already established with an impressive 64 million user accounts. That exceeds the number of accounts that Discover has and will quickly pass the 65 million accounts of American Express. Plus, the number of PayPal accounts is currently growing at a hefty 58%. But as impressive as the rapid growth of PayPal is in the eBay network, the true potential lies in grabbing a larger percentage of the whole e-commerce pie. PayPal is already used to fund 9% of e-commerce in the US. And the global off-EBay market represents a $300 billion opportunity that is 12 times larger than the eBay.com market
"Overall, PayPal is an essential element of the company’s growth strategy and we believe that over time it will actually dwarf the eBay.com site as a revenue generator. In much the same way that debit cards have been adopted as payment solutions, EBay has now recognized the synergistic value of PayPal. When merchants recognize similar effects, the benefits to eBay will be huge. Given the company’s ability to execute, we believe the head start it has in e-commerce will allow eBay to largely fulfill its PayPal mission. While the market is largely discounting the success of this huge undertaking, eBay stock trades at a bargain in our view. We believe eBay represents the most compelling opportunity to invest in the staggering global growth potential of e-commerce."