PayPal's Spending $4 Billion To Expand Beyond Payments

PayPal (NASDAQ:PYPL) just made its largest acquisition ever. It's buying Honey, an online shopping and rewards platform, for about $4 billion.

Honey's browser plugin automatically tests promotion codes on merchant websites at checkout to make sure shoppers aren't missing out on savings. It also partners with merchants to offer exclusive savings and gives shoppers cash-back rewards for using it, among other features. It counts 17 million active users.

Management outlined an important goal for the company in its press release announcing the acquisition. "Honey will enable PayPal to reach consumers at the beginning of their shopping journeys." PayPal wants to move beyond an afterthought in the online shopping experience to become the place consumers go to when they're looking to discover new products and deals.

Owning the shopping journey

The way consumers shop online is constantly changing. Product discovery takes place on social media platforms like Facebook (NASDAQ:FB) or Instagram. Facebook even explored a dedicated shopping app for Instagram, it partnered with several merchants to integrate a checkout flow within Instagram, and it's rolling out a new payments infrastructure to facilitate commerce across its family of apps. Facebook wants to own the entire shopping journey from discovery to checkout, particularly on mobile.

Meanwhile, other tech companies such as Apple and Samsung have built out digital wallets integrated directly into their hardware. On Apple's fourth-quarter earnings call, CEO Tim Cook pointed out that Apple Pay transactions exceeded PayPal's last quarter, and they're growing four times as quickly. Alphabet's Google is notably planning a bigger push to get into consumers' checking accounts.

That's a significant threat to PayPal. PayPal's strength over the last few years has come from mobile. That's because PayPal makes it easy to shop across merchants without needing to type in payment information or reauthenticate your account (thanks to its OneTouch technology). But if a shopper can do the same thing with Facebook Pay, and they're already discovering products on Instagram, then why do they need PayPal?

Honey isn't a direct answer to Facebook's efforts to own the shopping journey. Instead, it offers an opportunity for PayPal to participate in deal discovery and leapfrog from the end of the shopping journey to the start. Doing so gives PayPal another way to facilitate commerce and provide value to both consumers and merchants -- exactly what Facebook's aiming to do.

Incentivizing PayPal and 10x-ing Honey's user base

PayPal has over 275 million active consumer accounts on its platform. One challenge for Honey's team will be scaling its product to PayPal's user base. However, successfully integrating Honey's capabilities with PayPal could incentivize shoppers to click that PayPal button at checkout.

If shoppers using PayPal can be confident they're getting the best deal available, they're more likely to use it compared to other digital payment options. Additionally, PayPal could incorporate Honey's cash-back program to reward shoppers for using PayPal at certain merchants.

On the other side of the coin, PayPal will quickly grow Honey's user base. That gives the company more leverage in drawing in more merchants to its platform and negotiating exclusive promotions and higher cash-back rates. That could create a virtuous cycle, drawing in more users to the discovery platform and further incentivizing them to use PayPal/Honey at checkout.

Is it worth $4 billion?

There's no doubt $4 billion is a high price to pay for Honey, which is barely profitable and generated just $100 million in revenue last year. That's a multiple of 40 times -- around twice the valuation PayPal paid for iZettle last year.

However, Honey could produce significant synergies for PayPal as well as bolster its presence in the online shopping experience. That could be key for the company as it sees significant competition from Facebook and other tech companies drawing in shoppers through discovery platforms like Instagram and integrated mobile payments options.

PayPal expects the deal to be accretive to earnings by 2021. Honey's current profitability mitigates the risk to a certain degree, but it's still a big bet from PayPal that it can successfully expand its presence in the shopping journey.

This article originally appeared in the Motley Fool.

Adam Levy owns shares of Alphabet (C shares), Apple, and Facebook. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Apple, Facebook, and PayPal Holdings and recommends the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and short January 2020 $97 calls on PayPal Holdings. The Motley Fool has a disclosure policy.