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Morningstar | PayPal’s Near-Term Outlook Is Bright, but Its Long-Term Prospects Are More Uncertain

PayPal’s development of a network of merchant and consumers early in the evolution of online commerce has allowed the company to build and maintain an enviable competitive position within this niche. In recent years, the company’s growth has remained somewhat turbo-charged by two secular tailwinds, that is, the ongoing shift toward electronic payments and the rise of e-commerce. With its focus on online and mobile payments, PayPal is well positioned to extend its run of strong growth in the near term. Management has set a target of high-teens top-line growth over the next few years, and we believe achieving this is realistic. Longer term, though, the picture is less clear, and we see a mix of opportunities and threats that create a fairly wide range of outcomes. PayPal remains a somewhat unique player within the electronic payment ecosystem. We think this remains its key strength, but its position on both the merchant and consumer side could be challenged over the long run. With e-commerce becoming a more material portion of the market, traditional point-of-sale acquirers are building out their online capabilities. On the consumer side, services such as Apple Pay represent a new type of competition for PayPal. If competition on both sides chips away at PayPal’s position, the network effect that has driven the business historically could deteriorate quickly. On the other hand, PayPal remains a preferred partner in the online space. Further, the acquisition of iZettle gives the company a viable platform for point-of-sale transactions, and its experience with mobile payments could boost its position on this side as consumers look for more convenient options at the cash register. As a result, PayPal could leverage its online niche into a growing presence in point-of-sale transactions and see meaningful new opportunities to monetize its narrow moat. In balance, we think the company can hold its own, and any losses in its online position can be made up elsewhere. However, we recognize the potential to veer in either direction.