Why Apple Pay and PayPal Could Be 'Frenemies'
Apple Pay is clearly a potential disruption to eBay's PayPal, but we don't view mobile payments as a zero-sum game, says Morningstar’s R.J. Hottovy.
Commentary
Apple (AAPL) unveiled its iPhone 6 and Apple Watch products on Sept. 9, and as widely anticipated, mobile payments will play a prominent role. Apple Pay will allow iPhone and Apple Watch users to pay with Visa, MasterCard, and American Express cards stored to their iTunes account or Passbook. The system will use one-touch checkout, with a Secure Element chip to store data and near-field communication to transfer it to merchants at the point of sale (with Touch ID and device suspension capabilities offering additional security). Apple noted that it has acceptance from a wide range of merchants/aggregators, including Macy's (M), Walgreen (WAG), McDonald's (MCD) , Panera , Starbucks (SBUX), Target (TGT), Whole Foods , Groupon (GRPN), and OpenTable. Apple Pay will be built into new iPhone products and available for other iPhones as part of the iOS 8 update in October.
Clearly, Apple Pay is a potential disruption to eBay's (EBAY) PayPal, which processed $27 billion in mobile volumes in 2013. The new platform represents one of the first digital wallets that can rival PayPal's convenience, security, and merchant acceptance. However, we don't view mobile payments as a zero-sum game, and we believe that PayPal's mobile platform offers some advantages, including consumer-to-consumer fund transfers, small-merchant acceptance (via PayPal Here), cross-border reach, and Bill Me Later, each of which could encourage collaboration between Apple and PayPal. Additionally, other mobile companies like Samsung are likely to follow Apple's lead and make more aggressive inroads into mobile payments, with PayPal being a potential partner because of its user base and functionality.
There is no immediate change to our $63 fair value estimate for eBay, and the implications for its wide moat depend on whether Apple Pay disrupts PayPal's network effect. We view shares as undervalued, and while Apple Pay adds risk to the PayPal investment story, it could also motivate PayPal to accelerate its mobile commerce plans.
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