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By Jim Sinegal | 07-29-2015 10:00 AM

Why Paypal Is So Interesting

Despite some challenges, this narrow-moat company has a big opportunity ahead, says Morningstar's Jim Sinegal.

Securities mentioned in this video
PYPL PayPal Holdings Inc
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Jim Sinegal: PayPal (PYPL) is one of the most interesting companies we're covering at the moment for a few reasons. First of all, they have a big head start in the digital-wallet game. Second, they have a large and growing network of users and merchants who accept it online. And third, they have a great new management team led by Dan Schulman, formerly of American Express (AXP).

The big issue for PayPal is that the line between online and physical commerce is blurring. They have historically had a strong hold in the online space. A lot of online merchants accept PayPal, whereas people still use cards, for the most part, at physical merchants. What's happening now is that you can use your smartphone to buy something online and also to pay at a physical store with something like Apple Pay. That's going to be a big problem for PayPal to deal with. On the other hand, there is a unique opportunity there. PayPal isn't linked to the devices themselves, like Apple's and Google's solutions are. And PayPal is positioning itself as a merchant-friendly alternative. Merchants do not like the existing payment system; it costs a lot for them. So, PayPal really has a big opportunity there.

We have initiated coverage on the name with a $42 fair value estimate. We think because of the company's moat, its brand, its network of users, as well as the number of opportunities it has to expand going forward, it would be an interesting name to pick up at a discount to our fair value.

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