Is Xoom Really A Threat To PayPal? Gene Munster Digs In

• Paypal Holdings Inc PYPL shares are down 8 percent in the last three months, even after hitting a high of $38 on July 17.
• Piper Jaffray’s Gene Munster maintained an Underweight rating on the company, with a price target of $30.
• Although PayPal is expected to post robust relative revenue and earnings growth, uncertainty around its competitive positioning and long-term economics warrant a discounted valuation, Munster said.

Analyst Gene Munster believes that Xoom Corp XOOM is too small in relation to PayPal and its synergy potential timeline is too long to impact the latter in the near term. He added, however, that although Xoom contributes only 2 percent of PayPal’s revenues at present, it offers significant long-term synergy potential.

Munster expects the Xoom acquisition to be beneficial in terms of cross-selling opportunities to PayPal’s 68 million user base in the US, its international user base and the cash flow funding opportunities for corridor growth.

“We believe the percentage of PayPal’s total ~169M users who consistently use international money transfer services is very low, though we acknowledge that a small percentage of converted PayPal users can have a meaningful impact on Xoom’s user count of 1.4M at the end of the 2Q15.,” the Piper Jaffray report stated.

Although PayPal offers investors a unique payment network with merchant acquiring capabilities, recurring revenue and attractive incremental margins, uncertainty around the company’s value proposition to consumers and merchants in an omni-channel payments scenario and the impact of competition on its long-term take-rate trends are areas of concern, Munster said.