Ben Preston, director of Orbis investment and analyst on Orbis Global Equity Fund (GB00BH6XLH54) is backing the recently re-listed PayPal (0R9U) to deliver high growth over the long term and take on the major credit card networks.
"Thirteen: unlucky for some. But during the 13 years PayPal was owned by eBay, its market value grew more than 20-fold. Recently re-listed, can the lucky streak continue?" he asks.
"Like any network, PayPal becomes more useful the more connections it offers. Now linking 170m shoppers with 7m merchants worldwide, its online payment system is starting to resemble the major credit card networks. The one big difference - it's growing much faster.
"If that's good for customers, it's even better for shareholders. While ordinary businesses have to invest capital to support their growth, reinvestment needs for a virtual network like PayPal's are minimal: shareholders get all the benefits of rapid growth without having to pay for it.
"What's more, the value of this growth is hidden from view. PayPal creates shareholder value in two ways, firstly by serving its existing users and secondly by acquiring new ones. But only the former contributes to the company's earnings; the latter appears as a cost when it's really an investment. Reported earnings vastly understate the true value being created.
"It may take time for this value to be recognised, but I'm willing to be patient. In the meantime, not only is the number of users growing, so is the value of each user. As an independent entity, PayPal now has the opportunity to form new connections and accelerate that virtuous circle.
"Of course, every investment has its risks: the money-back guarantee PayPal offers to users doesn't extend to its shareholders. But if its history is any guide to its future, we'd expect shareholders to be lucky enough not to need it."
