PayPal: Life After eBay
09/15/2015 8:00 am EST
Our latest featured recommendation is taking advantage of the changing payments landscape, including the greater adoption of mobile devices for payments, explains Stephen Biggar of Argus Research.
In addition, the company has strong brand recognition, with 169 million active users and a presence in more than 200 countries.
eBay accounted for about 24% of the company’s total payment volume in 2014, although we expect this percentage to decline as PayPal expands its network of accepting merchants.
It is accepted at more than 70 of the top 100 retailers in the US and we expect even greater penetration in the next year.
Total payment volume rose 26% to $235 billion in 2014 and payment transactions rose 22% to 4.0 billion.
In our view, the company has several strengths that put it ahead of the competition, including a strong international presence, with 100 million non-US users in more than 200 countries.
The December 2013 acquisition of Braintree expanded the company’s position in mobile payments; the acquisition included Venmo, a mobile application that allows money transfer between friends and family.
The company has been transparent with its 2015 financial goals, which include revenue growth of 15%-18%, an operating margin of 20%-21%, free cash flow of $1.6-1.8 billion, and capital expenditures of 8%-10% of revenue.
Medium-term goals include revenue growth of 15%, stable to growing operating margins, and free cash flow growth in line with revenue gains.
Our target price of $42 implies a multiple of 28-times our 2016 EPS estimate, a modest premium to Visa and MasterCard, reflecting PayPal’s stronger growth prospects.
We are initiating coverage of PayPal Holdings, Inc. (PYPL) with a Buy rating and a target price of $42.
We attribute PayPal’s recent price decline to the broad market pullback, rather than to company-specific weakness, and believe that the current share price provides a favorable entry point.
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