Though the $4 billion price tag is raising a few eyebrows, PayPal Holdings Inc.’s deal for online-discount platform Honey generally won praise from analysts after the company’s announcement late Wednesday.
Analysts expect that PayPal
will be able to extract value from the Honey deal by boosting its relevance with consumers, improving customer engagement, and expanding Honey’s international distribution. Honey is known for a browser extension that lets customers find deals on products they are looking to purchase.
PayPal’s stock is off 0.4% in Thursday trading.
In a note titled “$4B reasons to like Honey,” RBC Capital Markets analyst Daniel Perlin pointed to several Honey data points, including that 90% of Honey users are active every month. He sees room for PayPal to drive usage higher, especially because the digital payments pioneer is engaged with customers before they make purchases.
PayPal’s deal “enhances its already strong two-sided engine, driving catalyst-based offers (~40% of ecommerce is driven by some trigger to purchase) and product discovery versus a single checkout payment option,” Perlin wrote. He rates PayPal shares at outperform with a $120 target.
William Blair’s Robert Napoli relayed management’s belief that the Honey purchase could be “transformational” by making the PayPal product more relevant and adding additional features for both merchants and customers.
“The Honey assets should help improve customer engagement and drive more volume,” Napoli wrote. “Management plans to integrate the capabilities broadly into PayPal within the next six to 12 months after close. We believe Honey will be very attractive to Venmo users in particular. A high percentage of Honey users are millennials and 79% are currently women.” He rates the stock at outperform.
Bernstein’s Harshita Rawat said that “leaving aside the price tag for a moment,” the acquisition serves a key purpose for PayPal. Her analysis shows that PayPal has a greater than 70% share of internet users in the U.S. and a greater than 80% share of merchants, but that the company only has a third of U.S. e-commerce market share, excluding Amazon. This would mean that PayPal users often aren’t using PayPal even if the merchant supports it.
“Driving user engagement is key for PayPal to sustain volume growth,” Rawat wrote. “Bringing the PayPal checkout button at the beginning of a shopping journey (vs. at the end at checkout) potentially enables PayPal to capture greater share of checkout (e.g., if there is a buy button present [on] the presentment of an offer, etc. – in PayPal’s mobile app or on a web-browser) and also engagement on the app (e.g., there are currently limited reasons for users to visit the PayPal app beyond P2P use-case).”
As for the $4 billion deal price, Rawat concedes it is “somewhat rich” at an estimated enterprise-value-to-sales ratio of greater than 10 to 15 times estimates for the next 12 months.
PayPal shares have risen 23% so far this year as the S&P 500
has climbed 24%.