Does PayPal Need Amazon?
Contrary to popular belief, PayPal Holdings (NASDAQ: PYPL) does not need to be an Amazon (NASAQ: AMZN) payment option to be successful. The recently released fourth quarter 2015 financial numbers show that PayPal can get along just fine without Amazon.com.
The numbers show us that PayPal’s business has been growing at an impressive rate since eBay Inc. (NASDAQ: EBAY) cut it loose during the summer. Both revenue and cash at PayPal have been growing at an impressive rate, according to the recently released figures.
PayPal’s revenue grew by nearly one billion dollars ($860 million to be exact), or by a little over 10%, during 2015. PayPal started 2015 with a revenue of $8.025 billion and finished it with a revenue of $8.885 billion.
More importantly, the amount of cash that PayPal is generating grew over the year. PayPal reported $2.22 billion cash from operations in December 2014 and $2.449 billion in December 2015. This means that its operations compare favorably with MasterCard (NYSE: MA), which reported $3.739 billion in cash from operations on September 30, 2015, and Discover Financial (NYSE: DFS), which reported $3.81 billion in cash from operations for third quarter 2015.
PayPal Is Making Money
The fourth quarter numbers clearly show us that PayPal is making money without Amazon. Some of the other positive figures for PayPal include:
- A net income of $1.147 billion.
- A profit margin of 13.33%.
- A free cash flow of $519 million.
- A return on equity of 10.71%.
- Cash and short-term investments of $4.299 billion. This number approaches that at MasterCard, which had $5.109 billion in the bank on September 30.
PayPal Is Now a Major Payment Processing Company
Okay, so what can we learn from these numbers? Obviously, the most important lesson is that PayPal is viable and highly profitable as a standalone company. It can survive on its own and make money.
More importantly, PayPal does not need eBay; it can function on its own without eBay’s marketplace. That’s good news for PayPal investors but bad news for eBay, which is facing an increasingly uncertain future.
The most important lesson, though, is that PayPal is now a major payment processing company that rivals MasterCard and Discover Financial in size and scope. Its resources already approach those of MasterCard, although it is still dwarfed by Visa and American Express.
Why PayPal Can Live without Amazon
PayPal can survive without Amazon because its customer base has been growing at an impressive rate. Statista reported that there were 161.5 million active registered PayPal users in fourth quarter 2014; a year later, in fourth quarter 2015, that number had grown to 179 million.
That means PayPal added 17.5 million new members in 2015 even though it is not a direct payment option on Amazon. PayPal is growing at an impressive rate without Amazon’s help. The company may not need Amazon, because it increased its volume of users without the help of the Everything Store.
That did not mean Amazon was not trying; usage of its answer to PayPal, the awkwardly named Pay with Amazon, grew by 150% at competitors’ sites, Fortune reported. Although, that number is not as impressive as you might think, because only around 23 million people used Pay with Amazon to pay outside the Everything Store’s massive ecosystem.
These numbers cast doubt on Pay with Amazon’s success because Amazon has 285 million members. If Fortune’s numbers are true, less than 10% of them are using Pay with Amazon as a general online payment solution.
Something that must be pointed out here is that it is easy to use PayPal to buy from Amazon right now; I do it all the time. All you need to do to use PayPal at Amazon.com is to get one of PayPal’s credit or debit cards. Amazon gladly accepts those and even lets you use your PayPal balance to make purchases.
Another problem Amazon could be facing is that most of Pay with Amazon’s users are Amazon merchants that are selling through the service. Customers might view Pay with Amazon as a merchants-only service, which means more promotion could be needed to get it over with the public.
PayPal Is a Value Investment
PayPal’s ability to get along without Amazon proves that it is a good long-term buy and hold play and a value investment. PayPal can be viewed as a value because of the cash it generates and its relatively low price; it was trading at $36.14 a share at the close of trading on January 29, 2016.
If you are looking for a low-risk financial sector stock with a lot of growth potential, PayPal would certainly be a good pick. It has a lot of cash, it’s growing fast, and it’s cheap. With or without Amazon.com, PayPal has a very bright future ahead of it.
Disclosure: The blogger owns shares of both PayPal and eBay and plans to keep them for a long, long time.
