Despite all of its growth, PayPal (NASDAQ:PYPL) has a slight problem. It used to have the digital wallet and online payment market all to itself. But these days, PYPL is facing some pretty big competition from a variety of start-ups and even traditional banks. Getting its mojo back and fighting off that competition are its main concerns.
That is why PayPal’s acquisition of Honey is a pretty sweet deal for PayPal.
While Honey may not be well-known to many investors, its user base is constantly growing and it fills an important niche in PayPal’s ecosystem. That is, Honey, which enables its customers to find deals, will enable PayPal to interact with consumers before they process their payments, As a result, PayPal will be able to hook them in early and funnel them into its system.
The Honey acquisition makes a ton of sense for PayPal stock because it will enable the company to fight off much of the competition that’s now eating away at PYPL’s market share and revenue, thereby undermining PYPL stock. In the end, PayPal’s biggest acquisition to date is going to be one honey of a deal.
PayPal’s Growing Problems
Companies know they’re doing well when everyone starts copying them and offering similar services. That’s been the case for PayPal. It basically designed the online digital wallet and peer-to-peer payment markets. That first-mover status has been wonderful for PayPal’s bottom line for years now. Perhaps it’s been too good.
These days, competition runs deep in the digital payment space. Companies like Stripes and Square (NYSE:SQ) have moved into payment processing and peer-to-peer payments, while companies like Apple (NASDAQ:AAPL) have built digital wallets directly into their hardware.
And threats continue to mount for PayPal stock.
Facebook users who see something they like on Facebook Marketplace can now instantly buy it from a seller. And with Instagram now basically becoming a shopping app, integrating direct payments eliminates a step in the buying process.
All of this is a huge problem for PYPL stock, as PayPal was traditionally the facilitator of all of these transactions. And while its revenues and volumes haven’t been hurt just yet, some cracks in PayPal’s armor are starting to emerge. For example, on Apple’s last conference call, Apple CEO Tim Cook mentioned that the number of Apple Pay transactions exceeded PayPal’s and that Apple Pay was growing nearly four times as fast as PayPal.
Honey to The Rescue
With mobile payments being such a huge part of its current and future revenues, PayPal had to do something to keep its leadership position entrenched. So, it turned to a relatively unknown start-up , Honey,to do just that.
Honey’s basic M.O. is helping consumers save money on various e-commerce transactions. It offers a suite of price-tracking tools, coupon codes and a rewards program called Honey Gold. The rewards program provides cash back to Honey’s users. All of that is done via mobile devices, the traditional web or automatically through a Chrome browser extension.
Here’s where it gets interesting for PayPal. By buying Honey, PYPL can basically move ahead of the line and into the deal discovery stage of shopping. And once consumers find those deals, their default choice for paying for them will be PayPal’s system.
That could be particularly lucrative for PayPal, since a main feature of Honey’s mobile app allows consumers to load a shopping cart with multiple retailers’ items and pay for them all at once. By using PayPal’s OneTouch authorization or its Venmo payment system, consumers would be able to pay for the products offered by Honey very easily.
On the flip side, Honey will help PayPal’s merchant partners as well. Those 24 million merchants now will have the ability to publicize targeted, more personalized promotions and incentives to Honey’s users, enabling the businesses to attract more consumers. That could be a great way to increase their sales. Meanwhile, PayPal will get a cut of both the advertising/promotion charge and the payment processing fees.
And when looking at PayPal’s user base of nearly 300 million, the acquisition makes a ton of sense. Right now, Honey has only 17 million users. By increasing its size and making it available to all PYPL users, PayPal will create a cycle of more deals,higher payment volumes and continued growth for itself.
Most importantly, Honey gives PayPal an edge over its rivals and creates an enclosed shopping ecosystem and a huge competitive advantage that will help it prevent further market share losses.
The Honey Acquisition Will Be Great for PayPal Stock
Looking at the digital payment environment, one thing is clear: Every firm is trying to offer a closed system that locks in users. By buying Honey, PayPal is now essentially doing that. Honey’s app will allow PYPL to jump into the front of the line, hook consumers in with deals, facilitate payments and reward them for their shopping. That will keep them coming back for more discounts and keep them in PayPal’s system.
For the owners of PayPal stock, that is wonderful news because the deal will help PYPL fight some of the rising competition that it now faces.
Ultimately, the $4 billion price tag may seem like a drop in the bucket over the long haul as Honey is integrated and the cycle gets cooking. So the deal gives investors a new reason to be bullish on PayPal stock.
At the time of writing, Aaron Levitt did not hold a position in any stock mentioned.