People exit PayPal Holdings Inc. headquarters in San Jose, California, U.S. (Photographer: David Paul Morris/Bloomberg)  

Third Point Takes PayPal Stake, Sees Shares Hitting $125

(Bloomberg) -- Dan Loeb’s Third Point has taken a stake in PayPal Holdings Inc. in a vote of confidence for the payments processor as it faces increasing competition from the likes of Amazon.com Inc. and Square Inc.

The New York-based hedge fund said PayPal stock could reach $125 a share within 18 months on above-consensus earnings, according to an investor letter obtained by Bloomberg. Third Point didn’t disclose the size of the stake, which it acquired in the second quarter.

Third Point detailed three revenue opportunities that it thinks PayPal can benefit from: Its Venmo platform, dynamic pricing and offline payments. It said it also expected more cost discipline going forward from the company.

“We see parallels between PayPal and other best‐in‐class internet platforms like Netflix and Amazon: High and rising market share, untapped pricing power, and significant margin expansion potential,” Third Point said the letter.

A representative for PayPal said the company appreciates the investment.

Revenue Potential

Third Point said Venmo could contribute $1 billion in revenue within three years.

PayPal is also just "scratching the surface on pricing power" as it shifts away from a one-size-fits-all" approach to charging merchants.

PayPal shares turned positive on the news, climbing as much as 2.7 percent after falling in early trading. Its shares were up about 1.3 percent, to $88.64, in New York trading at 1:23 p.m. Monday, giving it a market value of about $105 billion.

In May, it announced a deal to acquire Swedish small-business platform iZettle for $2.2 billion to help expand in Europe and Latin America and compete with Square.

The iZettle deal takes PayPal from the world of online commerce into in-store and offline payments, where global spending is much higher, Third Point said in the letter.

With revenue margins lagging peers, Third Point said PayPal could also benefit from some belt-tightening. It has opportunities to cut costs in information technology, customer service and credit servicing and collection, according to the letter.

"We also expect more cost discipline," Third Point said. "Margins are an area where PayPal management has a clear opportunity to deliver, even as the company invests for the future."

San Jose, California-based PayPal is facing a new threat from Amazon, which is offering to pass along discounts it gets on credit-card fees to other retailers if they use its own online payments service, people familiar with the matter said in May.

The fees on a typical credit-card transaction amount to about 2 percent of the total, with a charge of 24 cents for debit-card payments. Big retailers including Amazon and Walmart Inc. can negotiate lower rates based on their massive purchasing power. Amazon is offering to pass along discounts to some smaller merchants to encourage use of Amazon Pay, the people said at the time.

PayPal is also facing competition from upstarts such as Jack Dorsey’s Square, which has seen its shares more than double this year as investors bet on its continued growth.

Activist investor Carl Icahn led a lengthy battle at EBay Inc. from 2014, agitating for the company to spin off PayPal, a move it eventually agreed to and was completed in 2015. Icahn sold down his stake in PayPal to less than 1 percent last year.

Third Point also said its Third Point Offshore Ltd. returned 1.5 percent in the second quarter, pushing its total returns of 0.8 percent year to date into positive territory. It said declines on investments in Nestle SA and DowDuPont Inc. masked strong returns from other positions, including Baxter International Inc. and Netflix Inc.

After generating strong returns in Argentine sovereign debt from 2014 to 2017, Third Point said it overstayed its welcome in the region and took losses on those securities during the second quarter as the emerging market’s currency weakened.

"We do not presently have material exposure to Argentina but remain optimistic that Argentina’s excellent leadership will successfully navigate the current fiscal/monetary transition," Third Point said. "We are monitoring Argentina closely for potential opportunities from the sell-off."

Market Headwinds

While favorable economic conditions worldwide should continue, the economy is more fragile than it was a year ago, Third Point said.

"The single most important factor to follow is Fed action," it said. "If the Fed is determined to ’kill the patient’ through aggressive intervention in the form of rate hikes then the current health of the patient is irrelevant," it said.

An "out of control" trade battle would also undermine the economy, it said.

©2018 Bloomberg L.P.