On September 7, PayPal Holdings, Inc. (NASDAQ:), a U.S. payment company, announced the acquisition of Japanese unicorn Paidy, Inc., a buy now, pay later (BNPL) service provider, for $2.7 billion.
Paidy, which was formed in 2008, allows Japanese consumers to buy items online and pay later in installments at convenience stores or via bank transfer.
The installment payment service provider does not charge any interest for a limited period, which has been a catalyst for the growth of its popularity.
With the acquisition of Paidy, which caters to 4.3 million active customers, PayPal intends to tap into the world’s third-largest online shopping market – Japan. The transaction is expected to be completed in the fourth quarter this year and will be funded with cash.
I remain bullish on PayPal, as the company seems to be executing its international expansion plan successfully. (See PYPL stock charts on TipRanks)
PayPal’s Foray into BNPL
Over the last several years, BNPL has become a popular method of financing, and the demand for such solutions has accelerated due to the virus-induced recession.
The BNPL market is estimated to be worth $20.4 billion by 2028. PayPal launched a BNPL service in the United States named Pay in 4 in August 2020, which has since been used to make $3.5 billion in purchases.
PayPal has now established itself as a leader in the BNPL market, and on July 13, the company launched Pay in 4 in Australia as well. The early success of this payments solution has certainly improved the confidence of management, to the extent that it is now trying to tap into other international markets.
PayPal aims to become the preferred mode of payment in Japan, where online shopping volume has more than tripled in the last 10 years to almost $200 billion. Despite this stellar growth, more than two-thirds of all purchases in Japan are still made using cash, which highlights the massive opportunity available for alternative payment solutions providers to penetrate this market.
The younger population in Japan, particularly those who are living in cities, are gradually shifting to online shopping, and many e-commerce companies are partnering with BNPL platforms as a result.
Customers’ preference for BNPL is also influenced by the availability of interest-free payments. BNPL service providers make money by charging merchants a fee to provide customers with short-term financing that they can repay in interest-free installments, without having to undergo a credit check.
Paidy’s acquisition will broaden PayPal’s capabilities and influence in Japan’s domestic payments industry, strengthening the company’s existing cross-border e-commerce business.
Paidy underwrites transactions and guarantees payments to merchants using proprietary models and machine learning. The Japanese unicorn, with its innovative product Paidy 3-Pay monthly payment offering, has boosted engagement among its more than 6 million registered customers, and has attracted key partnerships with leading global brands and online marketplaces.
Paidy will continue to operate its existing business, and maintain its brand name, following the acquisition by PayPal.
Wall Street’s Take
Soon after PayPal announced the acquisition of Paidy, many Wall Street analysts, including Citi analyst Ashwin Shirvaikar, Mizuho Securities analyst Dan Dolev, Oppenheimer analyst Dominick Gabriele, and BTIG analyst Mark Palmer released research notes in which they commended PayPal’s management.
Because 70% of all purchases in Japan are still completed with cash, there is a long runway for growth for PayPal if the company can tap into this lucrative market early to enjoy first-mover advantages.
Based on 26 Wall Street analysts offering 12-month price targets for PayPal, the average price target comes to $337.70, which implies 19.3% upside potential.
The online payments industry has benefited greatly from the stay-at-home economy in the last 18 months, and this trend can be expected to continue in the post-pandemic era as well.
Paidy’s acquisition will provide a solid platform for PayPal’s growth in the rapidly expanding Japanese e-commerce market, and the company is likely to scan the market for more acquisition opportunities to accelerate its international growth.
Disclosure: At the time of publication, Dilantha De Silva did not have a position in any of the securities mentioned in this article.
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