Since Saul initiated a position, just thought I would share my notes.
The Twitter Intro
PayPal is a technology platform that allows its customers to accept and receive digital and mobile payments anywhere in the world, anytime, on any platform and through any device (e.g., mobile, tablets, personal computers or wearables).
PayPal’s history is a short but storied tale that involves some of the most legendary entrepreneurs that have passed through Silicon Valley. Indeed, some even credit PayPal’s incredible success for transforming Silicon Valley into the hotbed for tech startups that it is today.
Early Days. In 1998, Max Levchin and Peter Thiel met at a lecture Thiel gave at Stanford University. After exchanging ideas for startups, the idea they liked the best was developing cryptography for handheld devices, namely Palm Pilots. The company is this early phase was called Fieldlink.
In 1999, after Fieldlink failed to gain traction, the company changed its name to Confinity and shifted focus to a much more specific application: Transferring cash using Palm Pilots. This Wired article from 1999, besides being amazingly quaint, also shows the extraordinary vision Thiel possessed even at these early stages in the company’s growth:
The bill for lunch arrives, but you’ve left your wallet in the car. Your lunchmate doesn’t want to pick up the tab.
So she pulls out her Palm III, beams you a little program called PayPal, and suggests you beam back your share of the bill. Later that day, the cash comes out of your account and drops into hers.
That scenario should be a reality by September, when Confinity, a Palo Alto, California software start-up, launches PayPal, an application that will allow individuals to “beam” sums of money between handheld devices such as mobile phones, Palm Pilots, and pagers.
“All these devices will become one day just like your wallet,” said Confinity CEO Peter Thiel. “Every one of your friends will become like a virtual, miniature ATM.”
Read the entire article at http://www.wired.com/1999/07/paypal-puts-dough-in-your-palm/…
Later that same year the company introduced the concept of transferring money via email, an idea that would eventually launch the company to dizzying heights.
In March 2000, Confinity merged with X.com, a company Elon Musk co-founded that was focused on online banking solutions. Musk believed so strongly in their flagship service that he renamed the company PayPal in 2001. After the company started receiving lots of positive feedback from eBay customers, the company shifted focus again, this time to the growing e-commerce market.
Musk would not remain the CEO for long. He believed the company should move from a Unix to Microsoft platform. He lost the battle and was replaced by Thiel shortly thereafter.
If this seems like a lot of fundamental shifts in focus, it was. Many of the early PayPal employees have since commented on how “nimble” the company was as a startup. In a video at the link, Reid Hoffman, former PayPal executive vice president who would later go on to co-found LinkedIn, explains the many “pivots” PayPal needed to perform just to stay afloat: http://www.fastcompany.com/1837839/reid-hoffman-paypals-pivo…
Besides being incredibly nimble, the company was also defined by the relationships and friendships within. Headhunters were never used to hire talent and, for better or worse, an eye was always kept on how well a potential hire would fit in with the existing employees:
“When we started PayPal, I remember one of the early conversations I had with Max [Levchin] was that I wanted to build a company where everybody would be really great friends and, no matter what happened with the company, the friendships would survive,” former PayPal CEO Peter Thiel said. “In some ways that was very utopian. We didn’t only hire our friends, but we did hire people that we thought we could become really good friends with.”
Looking back, it is remarkable how many characteristics PayPal pioneered for the modern day Silicon Valley startup. According to a Tech Republic article, they were:
1. One of the first viral apps: PayPal users were able to send money to someone without an account, forcing them to open an account to claim their money.
2. One of the first companies to use a platform strategy: Sacks said that PayPal was “essentially an app on top of eBay.”
3. One of the first companies to offer an embeddable widget: Users could put the PayPal payment logo onto an eBay auction. Embeddable content later became key for YouTube and was a big part of how it grew.
4. One of the first companies to rely on an iterative product strategy: Features were released whenever they were finished, not at the mercy of product cycles.
After PayPal turned their attention to e-commerce, eBay was never able to thwart them despite controlling the checkout line, perpetually changing the rules to their advantage, and releasing competing products. In 2002, PayPal went public and a few short months later were acquired by eBay.
The eBay Years. Within a year of being acquired, nearly all of PayPal’s key executives had moved on. The culture shock of trying to integrate with a more traditional corporation was just too much.
(Off topic side note: The original PayPal members, now affectionately known as the “PayPal Mafia”, went on to conquer the tech business world. Among the startups this group went on to found or co-found: LinkedIn, Yelp, Youtube, Tesla, SpaceX, SolarCity, and Yammer. This is from 2011, but this Business Insider article tried tracking them all down to note their various accomplishments since leaving PayPal: http://www.businessinsider.com/the-paypal-mafia-is-even-more…).
After being acquired, PayPal became eBay’s default choice and competed with and ultimately defeated a slew of competitors: eBay subsidiary Billpoint, Citibank’s C2It, Yahoo!’s PayDirect, Google Checkout, and Western Union’s BidPay. All these services were eventually shut down in the subsequent years.
In 2005, eBay acquired for PayPal the payment gateway of Verisign for $370 million.
In 2008, PayPal acquired Fraud Sciences, an Israeli online security startup to bolster their fraud prevention services for $169 million. Later in the year they acquired Bill Me Later, an online payments company offering credit at the checkout of thousands of online retailers.
In 2010, PayPal broke 100 million active user accounts. At the time, they were in 190 markets through 25 different currencies.
In 2013, PayPal acquired Braintree, an online payments platform for merchants, for $800 million. Also a part of the Braintree acquisition was Venmo, a P2P mobile payments app.
In 2015, PayPal acquired Paydiant for $280 million. Paydiant is a cloud-based mobile wallet. Later in the year, PayPal acquired Xoom, a digital international remittance company.
eBay Spinoff. In September 2014, it was announced eBay would spinoff PayPal. In July 2015 the spinoff was completed.
Why Customers Use PayPal
Answering and understanding this question is obviously crucial in evaluating PayPal’s future business prospects, but I think a lot of times people who don’t use PayPal’s services don’t quite understand PayPal’s appeal. Thus I am attempting to explain the attraction of PayPal to its millions of account holders. Of course, there might be many reasons that I miss so if you can think of any, please reply to this thread. Personal examples are welcome!
Let’s look at the primary reasons why people use PayPal’s flagship service:
1) Send or receive payments for online auctions and purchases on eBay, Etsy, and other websites. PayPal is, by far, one of the easiest ways regular people can accept payments online for the occasional sale of goods. For instance, my wife will sell about three or four things on eBay every year. PayPal allows her to do this seamlessly along with her customers. Ditto for the weekend artist or craftsman who sell their goods on Etsy or Pinterest.
2) Buy goods online with smaller retailers. Who has ever shopped for items online only to find the exact item they want at a great discount on a website from which they’ve never made a purchase before. In many such cases, it makes sense for the consumer to use PayPal over using a credit card.
For starters, there are security reasons. There is something to be said for entering your credit card and bank accounts once when you first open your PayPal account and then never having to do it again. By paying with PayPal you keep your information private, meaning you don’t have to worry about a hacker capturing your account data from online merchants you’ve done business with.
Many experts believe PayPal also protects your data better than the banking and credit card industry:
According to PayPal your data is safe. (But who wouldn’t say that?) PayPal states that your information is encrypted with the highest level commercially available. Its servers check your browser to make sure it employs the latest encryption technology and your data is stored on servers that aren’t directly connected to the Internet.
Slava Gomzin, author of “Hacking Point of Sale: Payment Application Secrets, Threats, and Solutions,” supports their contention. “If you have a choice on the Web, always select PayPal,” Gomzin says.
PayPal even pays hackers if they find vulnerabilities in its systems. According to Dean Turner, director of security intelligence at PayPal, “If you care about the product [and] you care about your customers, you care about your customers’ security – this is what you have to do.”
Second, there’s convenience. I hate fetching my wallet, retrieving my credit card from its confines, and then entering all of the accompanying information (e.g. credit card #, expiration date, CCV, billing address, etc.) every single time I want to buy something on the internet. It is much easier to click the PayPal icon on the retailer’s website and be done with it.
3) Peer to peer payments. It’s very easy to send money to friends or family – no matter the reason – using PayPal. It’s much better than writing and mailing a check or, even worse, using a service like Western Union at a steep fee.
Of course, PayPal offers many other services but I just wanted to try to explain why its flagship service is currently dominating the e-commerce payments market despite efforts from MasterCard, Visa, and American Express to cut into its market share.
Why Businesses Like PayPal
I think there are two primary reasons why any online business in today’s world has to offer PayPal as a checkout option if it wants to compete.
First and foremost, is the sheer amount of PayPal account holders. With nearly 180 million active accounts, no business would ever want to turn away so many potential customers. Second, businesses want to sell merchandise and no other online payment option does a better job of having shoppers finish their shopping experience with an actual purchase:
A new study from comScore shows PayPal has the edge over its rivals on that front. Shoppers using PayPal finished their purchases 87.5% of the time, compared to 51.1% for people paying with second-place Visa (V) Checkout. Other competitors such as Amazon and MasterCard (MA) were lumped into a single group with a 45.6% conversion rate.
A key factor in PayPal’s performance is its One Touch product, which debuted last year and enables payment authentication without requiring the shopper to enter a user name or password each time. Twenty-one million people currently use One Touch.
Look at those conversion rates again: PayPal crushes the competition when it comes to closing an online sale. Retailers who sell their merchandise and services on the web are not going to allow other payment services start crowding PayPal out.
Venmo: One cannot begin to talk about PayPal without mentioning Venmo. It has become a payments monster, devouring all other peer-to-peer services in its path.
Payment volume for the popular money-transfer app, now owned by PayPal, grew 154 percent year over year in the first quarter of 2016 to $3.2 billion. That’s up from $1.26 billion in the same quarter last year.
Practically all this growth is from millennials with whom Venmo is extremely popular. The Venmo app allows mobile users to transfer money person-to-person via their bank account, debit card, your Venmo balance and even credit card. They charge a nominal fee for credit card transfers. In other words, it’s a perfect app that allows young people to split dinner tabs, take a taxi together, or let a friend borrow some money without having to have the exact amount of cash on hand that the situation requires.
Venmo is actually a money loser for PayPal right now. It has to pay a small transaction fee for each of these money transfers but allows their users to make the transfer for free (except when it involves a credit card). But PayPal is slowly exploring ways for Venmo to make money without disrupting its user growth and I think that’s the right approach. Mark Zuckerberg took nearly the same approach with Facebook, famously not wanting to ruin Facebook’s coolness in its quest for profits and that seemed to work out pretty well.
Plus, PayPal is not sitting on its hands with Venmo. It is already exploring a Pay with Venmo option that would allow its users to pay for merchandise at physical retail locations:
PayPal thinks it may have an answer. Earlier this year it launched Pay With Venmo, a service that lets Venmo users easily place purchases in apps using their Venmo account information. PayPal will charge app makers a fee for each transaction that goes through the new payment method.
PayPal CEO Dan Schulman said on Wednesday’s earnings call that 550,000 Venmo users now are eligible to use Pay With Venmo. The service will be available to all Venmo users by the end of the year, he said.
Braintree: Sets up online payment systems for traditional and e-commerce retailers.
Paydiant: A cloud-based white label mobile wallet app. In other words, it allows businesses to create their own mobile wallet app.
Xoom: Xoom is a digital remittance company that allows users to transfer money across borders. From Fortune:
CEO Dan Schulman is trying a little bit of everything in his efforts to keep PayPal competitive. And immigrant workers in the U.S. may turn out to be one of his secret weapons, thanks to a PayPal subsidiary called Xoom.
Xoom is an app-based money-transfer service, designed to capture part of the $600 billion global market for remittances—money sent across borders, typically from a worker in one country to his or her family members in another. For decades, this business has been concentrated in storefront locations where lines are long and security problems can be a hurdle.
Last July, PayPal paid $890 million to buy Xoom, which moves such transactions out of the physical store and on to the mobile screen. Xoom’s app lets users transfer money to 53 countries, designating the recipient and specifying whether the payment should go to a bank account or involve a cash pickup or delivery. Senders must link transactions to a bank or credit card account, but it’s safer and cheaper than using a money-transfer office.
Revenues (millions) Q1 Q2 Q3 Q4 2014 1874 1983 1971 2193 2015 2137 2297 2258 2556 2016 2544 EPS (non-GAAP) Q1 Q2 Q3 Q4 2014 0.27 0.28 0.24 0.28 2015 0.29 0.32 0.31 0.36 2016 0.37
Revenue Growth (billions)
2015 Q1 TTM Revenue = 8.284
2016 Q1 TTM Revenue = 9.665
Year Over Year Revenue Growth = 16.55%, previous Q 15.3%
2015 Q1 TTM EPS = 1.09
2016 Q1 TTM EPS = 1.36
Year Over Year EPS Growth = 24.8%, previous Q 19.6%
P/E (Check Current Price) = 37.36/1.36 = 27.47
1YPEG = 27.47/24.8 = 1.11
Here is a look at some of PayPal’s other important metrics growth:
Payment transactions: 1.414 billion, + 26% YOY
Payment transactions per active account: 28.4, +12% YOY
Total Payment Volume: $81.056 billion, +29% YOY
Transaction margin: 60.4%
And here’s a look at the historic growth of those numbers:
# of Active Accounts (millions) Q1 Q2 Q3 Q4 2014 148 152 157 162 2015 165 169 173 179 2016 184 Payment Transactions (millions) Q1 Q2 Q3 Q4 2014 918 930 972 1144 2015 1123 1161 1216 1428 2016 1414 Payment Transactions Per Active Account Q1 Q2 Q3 Q4 2014 23 23 24 24.5 2015 25.2 26.1 26.9 27.5 2016 28.4 Total Payment Volume (billions) Q1 Q2 Q3 Q4 2014 53.676 56.736 58.184 66.039 2015 63.021 67.482 69.738 81.523 2016 81.056 Transaction Margin (percentage) Q1 Q2 Q3 Q4 2014 65.0 65.7 63.1 63.5 2015 64.2 63.8 62.3 61.1 2016 60.4
MasterCard (MA), PayPal (PYPL), and Verizon (VZ) Ticker Guide
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