Image Source: PayPal Holdings Inc – Press release covering its acquisition of Honey
By Callum Turcan
A holding in our Best Ideas Newsletter portfolio, PayPal Holdings Inc (PYPL) announced on November 20 it was acquiring the shopping and rewards start-up Honey for ~$4 billion. Honey is a high-growth technology platform (delivered through a browser add-on and mobile application) that helps consumers find deals and save when they shop online. That includes finding price discounts, promotions and events, sending alerts, creating lists, and offering a rewards system known as Honey Gold to its ~17 million monthly active users. We think this deal is highly complementary to PayPal’s operations, and we continue to give shares of PYPL a fair value estimate of $125 per share.
Enhancing Value and Mining Data
Instead of competing just at the check-out page, PayPal will now be present during the entire phase of the consumer shopping experience (particularly for e-commerce). From the time the customer is initially checking out and researching items online, comparing various offerings to find the brand, product or service right for them, and ultimately at the final stage (checkout page), PayPal will now be able to gather a treasure trove of data that its ~24 million merchant accounts will likely find very useful.
Beyond Honey’s consumer user base, PayPal’s ~275 million active consumer accounts offers a great way for PayPal to quickly grow its ability to gather and mine customer data as it integrates Honey into its own operations. This data can be used to augment the ability for PayPal’s merchant clients to generate incremental sales from both PayPal’s user base (by sending targeted promotions and deals to PayPal’s consumer user base) and in general by taking that data into consideration for the merchant user’s internal purposes.
PayPal’s success with Venmo is key to supporting the mobile strategy here, as that better allows PayPal to be present not just on desktops and laptops, but in the handheld device most consumers carry around with them every day. It’s possible Honey’s mobile app (particularly Honey Smart Shopping Assistant) will be integrated with Venmo in some fashion. The more PayPal can offer its merchant user base, the more valuable its payment platform becomes.
For PayPal’s active consumer accounts, the company will be better able to direct these users towards deals for products and services they might find very appealing (creating potential incremental revenue opportunities by driving total payment volume growth on PayPal’s payment processing platform). Increasing engagement with its consumer user base by alerting them to new deals is one thing, but what really ties this strategy together is the Honey Gold loyalty rewards program. Honey users earn “Gold” when they shop using its platform, which are virtual points that can be redeemed for gift cards. Customer loyalty programs that are well-run and easy to use (a major appeal of Honey is that its platform offers a streamlined and simply experience for its users) tend to drive greater levels of user engagement, leading to dynamic effects that could enhance PayPal’s operations across the board.
Effectively, this acquisition not only helps PayPal better cater to the needs of its merchant accounts by growing its ability to learn about consumer trends and being present during a much greater portion of the shopping experience, but also offers a way to improve the experience for its consumer users as well. Playing a greater role in the entire e-commerce shopping experience further enhances the value of PayPal’s payment platform.
Additional Thoughts on Honey
As things stand today, Honey works with ~30,000 online retailers across numerous industries and helped millions save over $1.0 billion over the past year. Here’s what PayPal’s CEO Dan Schulman had to say about the transaction in the press release covering the deal (emphasis added):
“Honey is amongst the most transformative acquisitions in PayPal’s history. It provides a broad portfolio of services to simplify the consumer shopping experience, while at the same time making it more affordable and rewarding… The combination of Honey’s complementary consumer products with our platform will significantly enhance our ability to drive engagement and play a more meaningful role in the daily lives of our consumers. As a partner of choice for our merchants, this is another way that we can help them build and strengthen their customer relationships, provide personalized offers, and drive incremental sales. The combination of Honey and PayPal adds another significant and meaningful dimension to our two-sided platform.”
Furthermore, what makes Honey a particularly good fit for PayPal is that the deal will improve its profitability in the medium-term as Honey was profitable on a net income basis in 2018. Another key excerpt from the press release announcing the transaction:
Honey was profitable on a net income basis in 2018. Subject to customary closing conditions, including the receipt of regulatory approvals, the transaction is expected to close in the first quarter of 2020. The acquisition is expected to be accretive to PayPal’s non-GAAP earnings per share in 2021.
While PayPal will likely invest significant sums towards integrating Honey into its company-wide operations and expanding the offering to its significantly larger consumer user base, the profitable nature of Honey’s business model allows for this deal to be accretive much sooner to PYPL shareholders than if Honey was posting huge losses ahead of the transaction.
Concluding Thoughts
It will be very interesting to see how Honey augments PayPal’s growth trajectory going forward, and we view this transaction as highly complementary underpinned by sound business reasoning. Sure, there will always be questions over the price paid for the deal, but what PayPal is going after is Honey’s top quality platform, user interface, loyalty program, and ability to gather consumer data, not its very modest revenue streams. Put another way, this deal is all about augmenting PayPal’s free cash flow potential over the long haul by fundamentally improving its core operations. For a company that generated over $0.9 billion in free cash flows during the third quarter of 2019 alone (keeping in mind PayPal does not pay out a common dividend at this time), PayPal possess the financial capacity to make transformative deals like this.
Financial Tech Services Industry – MA MELI PYPL VRSK V
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Callum Turcan does not own a position in any of the securities mentioned above. Visa Inc (V) and PayPal Holdings Inc (PYPL) are both included in Valuentum’s Best Ideas Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.