PayPal Holdings Inc (Nasdaq: PYPL) has announced its largest buyout, a $2.2 billion deal for Swedish payments startup iZettle. PYPL stock traded higher by more than 2 percent on Friday as investors and analysts signaled their approval.
IZettle’s business is primarily focused on providing card readers and digital payment products to small businesses. The buyout gives PayPal instant access to nearly 500,000 brick-and-mortar retail stores in 11 new international markets, including France, Germany, Brazil and Mexico.
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IZettle will likely not make a big immediate impact on PayPal’s financial numbers. The company reported a net loss of $26 million in 2017. IZettle is anticipating about $165 million in revenue on $6 billion in payments processed in 2018. Last month, PayPal reported $3.69 billion in revenue in the first quarter alone. PayPal said the iZettle buyout will dilute earnings per share by 1 cent.
IZettle’s business may not be huge, but it’s growing at an impressive rate. From 2015 to 2017, the company’s revenue reportedly grew at a 56 percent compound annual rate. IZettle is targeting 40 percent annual revenue growth over the long term and has said it expects to become profitable by the end of 2020.
Bank of America analyst Jason Kupferberg says iZettle is a great fit for PayPal. “We believe that strategically the acquisition makes sense and provides both increased in-store presence and greater international exposure in both Europe and Latin America,” he says.
The iZettle deal may be good news for PayPal investors, but not for Square ( SQ), which Kupferberg says is iZettle’s largest competitor.
Morgan Stanley analyst James Faucette says PayPal is directly challenging Square with the iZettle buyout.
“While SQ’s strong brand recognition will help to preserve its position as a leading provider of payment services for [small and medium-sized businesses] in the U.S., extending that brand into other markets, including the four it is currently in [U.K., Japan, Canada and Australia], could be challenged by PayPal’s ambitions to accelerate iZettle’s growth and scale,” Faucette says.
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For now, Kupferberg says PayPal’s upcoming Analyst Day event on May 24 could shed more light on the plan for iZettle and potentially be a positive catalyst for PYPL stock.
Bank of America has a “buy” rating and $88 price target for PYPL stock.
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PayPal Holdings Inc (PYPL) Is Directly Challenging Square (SQ) originally appeared on usnews.com
