eBay (EBAY) has acquired the payment startup company Braintree from its PayPal subsidiary which will give PayPal a strong foothold in the world of mobile app payments. This $800 million acquisition will also evolve PayPal from its roots as an online payments provider and expand its offline, mobile and online offerings to stores, restaurants and other business.
Chicago-based Braintree provides web and mobile payment processing for popular startup companies such as restaurant reservations site OpenTable (OPEN), vacation rentals site Airbnb, cab hailing app Uber and online retailer Fab. With Braintree, a customer of Uber or Fab can make repeated purchases on a mobile app with one click without having to keep entering their payment information or re-authorizing the payment through PayPal. Braintree charges businesses a fee of 2.9% plus $0.30 cents per transaction.
Braintree has become a one-stop-shop for all the services a business needs to receive payments from anywhere in the world. It processes more than $10 billion in payments annually, including $2 billion from payments made on mobile devices. The company said that 25% of its payment volume comes from outside of the U.S. It also expects to process about $12 billion in payments this year, approximately one-third of which is expected to be made from mobile platforms.
In addition, Braintree operates Venmo, a mobile payment solution that the company acquired last year for $26.2 million. Venmo allows people to pay and send money to each other for free. Some analysts said that this feature was a key part of what attracted PayPal to the company.
eBay CEO John Donahoe is very confident regarding this acquisition. He believed that this acquisition would help accelerate PayPal's global leadership in mobile payments. Currently, Braintree's Venmo powers mobile payments for 40 million people across a number of mobile apps. Braintree also has a broad international reach with merchants in 40 countries accepting payments in 130 different currencies.
Industry Growth
Advancement in technology as well as speedy and highly protected transactions increase the demand for these kind of services. The attraction of an anytime or anywhere shopping experience via smartphones and tablets exerts a great force on a global scale. According to the newly published Internet Retailer 2014 Mobile 500, by the end of 2013 mobile commerce in the U.S. is projected to grow 63% to around $34.2 billion from $21 billion in 2012. Mobile purchases will account for nearly 13% of all U.S. e-commerce sales up from just over 9% in 2012.
Mobile commerce companies also showed a tremendous growth internationally. According to Mobile 500, 107 European merchants will grow their combined mobile sales by 103% to 4.44 billion in 2013. And 19 Asian merchants will grow 84.8% to about $527.5 million.
Similarly, according to the Gartner research firm, worldwide mobile payment transaction values will reach $235.4 billion in 2013, reflecting an increase of 44% from $163.1 billion in 2012. The number of mobile payment users worldwide will reach 245.2 million in 2013 up from 200.8 million in 2012. Money transfers and merchandise purchases will account for about 71% and 21% of total transaction values in 2013, respectively, and it is expected that merchandise purchases will account for about 23% of the total value forecast for 2017.
From a regional perspective, Asia-Pacific's transaction value is expected to grow 38% in 2013 to reach $74 billion. Deployments in developed markets including South Korea and Singapore and in developing markets such as India are expected to drive healthy growth. As a result, in 2016, Asia-Pacific will overtake Africa to become the largest region by transaction value reaching $165 billion. Africa's transaction value is forecasted to reach $160 billion in 2016. While Africa will still experience strong growth through the forecasted period, companies are still searching for the most suitable business model for mobile money in their local markets. Therefore, the growth opportunity for the company is huge in these markets.
Sensitivity Analysis
As I mentioned earlier Braintree is generating its revenues from two sources: ((i)) a fixed rate charge (2.9% on transaction) and (ii) a 30 cent charge per transaction. So, in order to better understand how much it contributes to PayPal's revenue, I performed a sensitivity analysis of Braintree based on certain assumptions.
(click to enlarge)
For base calculation, pointed out in the above graph, I assumed an average transaction value of $100 per transaction based on the clients of the company. Using $10 billion in transactions processed with the 2.9% transaction charge the company managed to generate $290 million in revenues from fixed rate transactions and generated $30 million in revenue from 100 million transactions at the rate of $100 per transaction mentioned in the assumption above. Based on my assumptions, the company may have generated $320 million revenues in a year.
If you look at the sensitivity analysis, in the best case scenario the company could generate $448 million in revenues with annual payment proceeds of $14 billion (140 million transactions at $100 per transaction). Similarly, in the worst case scenario, the company may generate $192 million in revenues with annual payment proceeds of $6 billion (60 million transactions at $100 per transaction).
Conclusion
The acquisition would significantly add to PayPal's mobile-driven transaction volume. PayPal claims it will facilitate about $20 billion in mobile transactions during 2013. Braintree is set to do about $12 billion in total transactions for the year with about $4 billion of that coming from mobile devices.
Paypal said in a statement that by adding Braintree to the company's portfolio, the mobile transaction volume for PayPal would increase to 170% year-on-year. The company's digital and mobile transaction volume would increase to $193 billion reflecting an increase of 33% over 2012. Without Braintree the company's volume would only increase to $181 billion or 25% over 2012. Moreover, with the addition of Braintree's transaction volume, PayPal will also get access to Braintree's network of clients and mobile payment software. This transaction will strengthen its foothold in the U.S. market and will help the company to expand internationally. Based on this deal, I strongly recommend buying stocks in the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.
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