Narrow-moat PayPal (PYPL) is taking another step toward expanding its point-of-sale capabilities by acquiring Sweden’s iZettle, a competitor to Square. PayPal is reported to be paying $2.2 billion for the Swedish firm. We think the deal makes sense from a strategic standpoint—PayPal has long been attempting to become a player at the physical point-of-sale, and demand for new payment solutions from small businesses is growing at an exponential rate. Furthermore, we like PayPal’s use of its richly priced stock to fund the deal, and note that PayPal is receiving capabilities similar to those of Square (admittedly a considerably larger firm) for a reasonable price—Square’s market capitalization is roughly ten times the price PayPal is paying for iZettle. iZettle, like Square, is expanding from simple payment processing into enterprise management software and services. Over time, this offers both firms the potential for higher margins, although we point out that enterprise software is a much different business than payment processing. PayPal’s processing scale, its global presence, and its long experience working with small businesses should help the company continue to grow along with the market. Overall, the deal represents just a small percentage of PayPal’s market capitalization. We are not changing our fair value estimate.
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Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.