Why Apple Should Buy Paypal In 2019 Or 2020 (AAPL, PYPL)
Peter Sayles |
The whole world is predicting the downfall of Apple.
Apple investors continuously call for Tim Cook’s resignation because he’s not the innovator Steve Jobs was.
Investors say the only way for continued growth is for a major acquisition.
Its $3 billion purchase of Beats headphones in 2014 didn’t win any investors over.
Investors want something more. An acquisition to diversify away from iPhones.
iPhones make up 63% of total revenues. Iphones have always been the main source of revenue.
But people aren’t so interested in upgrading their phones every 8-12 months for $1,000 per phone anymore.
Apple stopped reporting unit sales back in November (2018). They then cut production and guidance twice after.
Its stock is down 30% since.
It needs a catalyst to get back to its trillion dollar market-cap.
iPads and Macbook computers/laptops aren’t growing.
Smartwatches just haven’t become the trend everyone thought they would be.
Apple owns 17% of the smartwatch industry, yet it’s classified in the “Other Products” category of its financial reports.
Apple TV’s were a flop too. It too is in the “Other Products” category.
The only “growth” Apple is seeing is its services segment – driven by the revenue it’s generating from the App store. It charges companies 30% for listing their apps in the Apple App Store.
But will revenue from the App store be able to replace the $187 billion it generates from iPhone sales? If it is, it’s a long way away. (The growth from its App store is one of the reasons we think it’ll buy the company we listed below.)
Cook can no longer sell more iphones and buy back shares to boost the stock.
Most investors have speculated Apple will use its $250 billion in cash and short term bonds to buy Tesla or Disney.
We (Grant and I – Peter) don’t think Cook would even exercise the thought of Tesla for one simple reason.
Tesla is a perpetual money loser in one of the most cutthroat industries. (We wrote about why no one would take Tesla private when Elon tweeted some company would last August).
(Disclaimer: We currently hold a short position in our MightyTrades portfolio. Click here to read our original write-up.)
Cook may not be an innovator like Musk… but he would never spend $50+ billion on a company that loses billions per year.
We don’t think Cook would buy Disney either.
For starters, we’re not quite sure the acquisition would pass antitrust. Apple already has duopoly market share in pretty much every electronic gadget.
Getting access to Disney’s theme parks, intellectual property, Marvel, Mickey Mouse and crew, Lucasfilm (Star Wars), ESPN, Hulu, and so many other things wouldn’t sit well with most politicians.
Second, Disney’s market cap is already $165 billion (as of this writing).
Would Apple spend $200 billion buying Disney? We’re not sure.
We know Apple is hellbent on getting into the original content game. It pledged to spend more than $4 billion creating original content by 2022.
But we don’t think that’s the best use of its cash hoard either. Why? Because it’s late to the trend. And is getting into competition with Disney, Netflix, Amazon, and Comcast.
Buying Disney or Netflix would make a lot more sense than trying to compete with them.
We’ve speculated Apple has plenty of reasons to buy Netflix. Apple would serve as the cash financier to Netflix’s $8+ billion in original content spend per year. And Netflix wouldn’t have to worry about investors claiming it’s burning billions per year with no profit in sight.
But Cook had the chance to buy them for the past 8 years. And at significantly lower prices.
(Who knows, maybe Cook offered to buy Disney or Netflix in previous years, but was turned down by both?)
Cook seems more intent on building products from within then spending up on another company in the world of content.
Other speculators think Apple should look at video-game creators like Activision Blizzard (ATVI).
That would make a lot of sense considering video game streaming is an exploding industry.
For example, 205 million people tuned into watch the League of Legends finals last year (2018). The year before it drew in 58 million viewers.
That’s near 4x growth for just one finals match for one video game.
Amazon saw this coming from a mile away and bought live video game streaming company Twitch for $1 billion in 2014.
Former Piper Jaffray analyst Gene Munster suggested Twitch could be worth up to $20 billion in 2016. Who knows what it’s truly valued at now?
Cook isn’t the visionary Jeff Bezos is. Nobody is. So we won’t blame him.
But we don’t think Apple would buy Activision Blizzard either. It’s outside of Cook’s core competencies. Cook likes to stick to what he knows…
Pumping out free cash and rewarding shareholders like nobody’s business.
You can fault Cook for not being Steve Jobs or Jeff Bezos. But you can’t fault him for not rewarding shareholders.
Apple’s stock is up over 200% since he took over as CEO. He’s increased Apple’s dividend by 55% since 2014 – about 11.6% annually. And he’s committed to buying over $100 billion in stock buybacks (although we don’t think this is the best use of its cash by any means. It could’ve been used to buy any number of companies. Like the one we listed below. But we digress.)
However, the time has come for Cook to do something.
Investors have pushed the stock down 30% from it’s all time highs. Its revenue growth has stagnated. And we don’t want to know what investors will do if it tries to sell $1,000 iPhones in what seems to be an upcoming recession.
So… what company do we think Apple should buy if Netflix, Disney, Tesla, and Activision Blizzard are out of the running.
Why Apple Should Buy Paypal
Shoppers around the world spent over $3 trillion online last year.
That number continues to grow as companies migrate their sales online.
Paypal is at the forefront of collecting fees from online transactions. It has 254 million active accounts worldwide.
It processed over 2.5 billion transactions in its most recent quarter alone – amounting to $143 billion.
It processes the credit card transactions from the likes of Airbnb, Uber, Stubhub, and thousands of other businesses.
Paypal will have doubled its revenues since 2014 – to $16 billion.
They expect revenue to grow 10+% next year. And they have made great acquisitions in recent past.
Paypal Acquired Venmo in 2013
Paypal acquired rights to Venmo in 2013 when it bought Braintree Payment Solutions LLC.
Venmo is a social app people use to send money to one another. Its popularity has exploded over the past couple years with 27 million users.
Here are some stats regarding Venmo’s growth and popularity:
- Venmo processed over $17 billion in total payment volume (TPV) over the past three months – growth of 78% (Paypal’s Q3).
- Venmo processed over $54 billion in TPV over the past 12 months.
- Financial Media company Bank Innovation found 68% of millennials use Venmo.
- Over 2 million retailers accept Venmo as a form of payment.
Third Point hedge fund manager Daniel Loeb estimates Venmo will contribute an extra $1 billion in revenue within three years.
Tapping into the millennial market should peak Apple’s interest. Venmo is the perfect way to learn even more about millennials spending habits outside of its own ecosystem.
Paypal Bought The “Square of Europe”
Paypal bought iZettle – the Swedish payment processor – for $2.2 billion in May 2018.
iZettle has a point-of-sales (POS) software and card reader just like Square (SQ). But its main presence is across Europe and Latin America.
iZettle states it has 28 million businesses on its platform. And claims it’s signing up about 1,000 new businesses to its platform every day.
This growth has lead to compounded revenue growth of 60% between 2015-2017 alone.
Forbes estimates transaction based revenue growth of 44% in 2018.
Paypal made a fantastic purchase in buying iZettle.
We’re assuming Apple wants to dominate the global payment market. Getting ownership of the “Square of Europe” from the buyout of Paypal would be a huge boon for the company.
Paypal Itself Is A Blue-Chip Cash Gusher
Paypal has become a dominant blue-chip company worthy of any investors portfolio (at the right price, of course).
Paypal has doubled its revenues over the past 4 years – a tough feat for a now $100 billion company.
It is going to pump out more than $4 billion in free cash flow for fiscal 2018. And has a fortress balance sheet with $10.5 billion in cash with no long term debt.
Paypal is an absolute stellar company.
Because Paypal is easy, efficient, and effective.
A recent Bloomberg Businessweek article stated Paypal’s conversion rate is an insane 89% from checkout page to order confirmation page.
Buying Paypal makes all the sense in the world for Apple.
It will immediately make it the top payment processor – between all of Paypal’s apps and Apple Pay.
Paypal + Apple Becoming The Top Payment Processor
Apple already 127 million users using Apple Pay.
Acquiring Paypal means it will take on Paypal’s 254 million active accounts.
This would put Apple on an entirely new course that investors could get behind. It allows Tim Cook to focus on what he does best: pump out cash for shareholders.
Cook wouldn’t have to worry about following in Jobs’ shoes for innovation. Or even being a leader in original content.
Instead it will become the market leader in online transactions. Something it’s already one of the leaders in. From Apple Pay to the App Store.
Remember, global spending online last year was $3 trillion.
Apple – combined with Paypal – would take significant market share. And still have room to grow (Paypal expects to grow revenues 14-15% alone this year).
The market is already fragmented among the likes of JPMorgan Chase, Visa, Mastercard, Google, Samsung, etc….
Apple would break away from the pack with this acquisition. And give it the growth catalyst all investors have been waiting for.
What Price Will Apple Pay For Paypal?
Paypal’s market cap is just over $100 billion.
Buying it wouldn’t be cheap. We are assuming a 20% premium to the current price (as of late January 2019). A 20% premium over its current valuation is reasonable for us to assume.
This means Apple would spend $120 billion buying Paypal.
How would Apple pay for it?
It could pay for Paypal any number of ways. Apple would pay for Paypal with ease whichever route it chooses.
1) Apple Buys Paypal In An All Debt Deal
Investors would prefer an all cash deal because it forces Apple to use its cash in some manner. But that’s not necessarily the best use of Apple’s balance sheet.
Interest rates are still at historic lows. Some are still negative across several countries in Europe.
Why not issue $120 billion in European debt at 1-2% interest?
What’s $1.2-$2.4 billion in annual interest payments to a company that makes $127 million every day of the year?
Second, Paypal has $10.5 billion in cash on its books. That means Paypal’s cash alone could pay the interest on its hypothetical debt for 5-10 years.
Third, Apple pumps out over $50 billion in free cash – the money left over after all capital expenditures.
Apple pumps out more free cash in one year than the market cap of spice maker McCormick and Ford Motors combined.
It could pay off $120 billion in debt in just two and a half years time – just off the free cash.
2) Apple Buys Paypal In An All Cash Deal
This one’s simple.
Apple has $250 billion in cash and short term bonds on its balance sheet.
Paying $120 billion for Paypal would still leave $130 billion left over.
That $130 billion could pay for other payment processor Square 4x over.
3) Apple Buys Paypal In An All Equity Deal
Another route would be Apple issuing $120 billion worth of equity – an extremely unlikely scenario. (Realistically it would issue equity and debt to buy Paypal if it took this route.)
Cook already has a $100 billion buyback program in place. Apple still has over $70 billion left to buyback its own shares.
Issuing $120 billion worth of stock would dilute shareholders by 10%. But if it just stuck to its buyback program, that would leave $50 billion left of equity to account for.
It could then take $50 billion off its balance sheet to retire those shares… bringing investors back to levels pre-Paypal acquisition.
This would leave $200 billion in cash and bonds left on its balance sheet.
Apple is one of the most profitable companies ever created in history.
Investors can thank Cook for a lot of that.
But Apple has reached its peak. iPhone sales are no longer growing.
Apple’s other revenue segments aren’t showing any growth outside its App store (which is undergoing a major legal battle over its “monopoly” that made it to the Supreme Court.)
This means Apple has to look for an acquisition to keep revenue growth its investors are looking for.
Apple has made tens, if not hundreds, of small time acquisitions. But none are making any dent to the top or bottom line.
We think Paypal would be the best acquisition it could make by far outside of Netflix (for totally different reasons – see here.)