PayPal: Beyond the Button

Note: I also appeared on a podcast to discuss payments industry. You can find the podcast here.

PayPal is a very special company in the Silicon Valley folklore. In 1998, Peter Thiel and Max Levchin started a company called “Confinity” which later merged with X.com, which was founded by Elon Musk. Following the merger, the merged entity eventually renamed it to be “PayPal”. What followed is an incredible density of talent mostly in their 20s and 30s who all banded together to solve payments in the internet. Just four years after it was founded, PayPal came to IPO following the crash of tech bubble at ~$800 Mn valuation. Less than five months after the IPO, eBay ended up acquiring PayPal for ~$1.5 Bn. The group of people who built PayPal in those early days became later known as “PayPal Mafia”; almost none of them decided to rest on their laurels and capitalized their newfound wealth from PayPal to go onto build companies such as Tesla, SpaceX, YouTube, LinkedIn etc., and invested in tens of companies which are valued hundreds of billions today.

Almost twelve years after eBay’s acquisition of PayPal, Carl Icahn came knocking the door with a specific message in February, 2014: “We believe creating two dedicated and highly focused independent businesses would provide employees and stockholders the best opportunity to remain competitive over the long term.”

In his characteristically scathing letter to the eBay board, Icahn even quoted Elon Musk: “it doesn’t make sense that a global payment system is a subsidiary of an auction website…it’s as if Target owned Visa or something”

In September 2014, it was announced that PayPal would be spun out of eBay and each eBay shareholder would receive one share of PayPal. As interesting and entertaining as it might be to study, introspect, and analyze the early days of PayPal, this deep dive primarily focuses on period following the spin-off in July 2015.

Here’s the outline for this month’s deep dive:

Section 1 PayPal’s opportunity: I elaborated on the breadth of product suits of PayPal and its total addressable market. I also touched on some competitive concerns in this section.

Section 2 PayPal’s economics I segmented PayPal’s economics in three categories: unbranded processing or Braintree, Venmo, and core PayPal or branded processing. I also discussed cost structure of each of these economics and trends over the last five years.

Section 3 Management, incentives, and capital allocation: I highlighted PayPal management’s incentive structure and capital allocation decisions in this section.

Section 4 Valuation and model assumptions: Model/implied expectations are discussed here.

Section 5 Final Words: Concluding remarks on PayPal, and disclosure as well as a bit more discussion on Spotify following its investor day.