Credit: Shutterstock photoThe online payments space has never been hotter, thanks to companies like Apple (AAPL), Google (GOOG), Square, Snapchat, Facebook (FB), and a host of others getting into the $34 trillion market, according to Goldman Sachs.
However, all of these companies generate revenue from other areas, leaving PayPal (PYPL) as the only pure play for the the payments industry -- a name investors may want to consider adding to their portfolio.
Goldman Sachs analyst Heath Terry initiated coverage on PayPal with a $48 price target, representing 31% upside from July 6 -- the first day PayPal shares were when issued -- noting the company has an enormous economic moat around it.
"While investor focus is on competitive uncertainties, near term margin pressures from mix shift, and needed investment, we believe PayPal’s value is best proven by other, primarily larger, companies’ numerous failed attempts at replicating it," Terry penned in a note. "Therefore, we view the risk/reward as favorable and initiate with a Buy rating."
PayPal, which is slated to go public on the Nasdaq under the ticker symbol "PYPL," has 165 million active users, giving the company a healthy and growing user base from which to generate revenue from. In 2014, PayPal had $235 billion in total payment volume, up 26% year-over-year, generating $7.9 billion in revenue in 2014, up 19% year over year. It's accepted at nearly 10 million merchants and the company is actively trying to expand that number, both online as well as offline, where there represents a massive opportunity, but so far, it's been met with mixed results.
It partnered with Discover several years ago, though it appears its efforts have not worked as well as PayPal would've liked, Terry stated in the report. PayPal also has a deal with Home Depot (HD) to use it in its stores, but Home Depot is also currently testing Apple Pay, a sign that the retailer is looking to make it even easier for customers to pay for goods and services.
Along with Apple Pay, the company does have several risks in the payments space, including the aforementioned competition. There is also Stripe, a hot payments startup that is looking to raised money at a $5 billion valuation, which poses a threat (Stripe also does a lot of back end work for Apple Pay).
With such competition in the space, Terry also noted that "transaction and operating margin pressures, and security threats" are among the other key risks PayPal faces.
PayPal has been busy working to make it easier for consumers and businesses, moving into other areas, including small business lending, in-app purchases, peer to peer payments and even offering a loyalty program. The company also recently announced its intentions to acquire Xoom, an online money-transfer company for around $900 million.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
