Weighing PayPal's Strategic Options In The Wake Of News From Visa And MasterCard

Bernstein’s Lisa D. Ellis believes investors are grappling with practical and strategic options for Paypal Holdings Inc (NASDAQ: PYPL) following the deals between Visa Inc (NYSE: V) and Mastercard Inc (NYSE: MA).

Ellis maintains a Market Perform rating on PayPal with a price target of $41.

Strategic Options

The analyst believes there could be six potential strategic outcomes for the company:

1. The most likely outcome is that PayPal continues to be an “acquirer/closed-loop hybrid, shifting to being debit-centric.
2. A less likely outcome and also a risk is that the company becomes a merchant acquirer.
3. Ellis believes the company is likely to have evaluated and rejected the option to become a closed-loop.
4. An option that had earlier been unlikely but following the Visa-MasterCard deals seems less unlikely is that PayPal is acquired.
5. “Low probability but not inconceivable – PYPL withers away and dies,” the analyst stated.
6. The last option, which Ellis mentioned was only included for completeness, was that PayPal “morphs into something else via acquisition.”

Related Link: PayPal Is At A Crossroads, Facing Growing Pains

Margin Pressure

The analyst expects the company to see margin pressure over time, especially after the Visa-MasterCard deals.

Furthermore, Ellis believes PayPal could be able to offset “some transaction expense growth pressure with moderated yield declines and cost control in FY17 and beyond” and deliver EPS CAGR of 12.5 percent during 2016-2020.

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