PayPal (PYPL) Earnings Show That Small Can Be Beautiful

In July of 2015, when eBay (EBAY) span off the payments company PayPal (PYPL), there were doubters. The move had come in part because of pressure from activist investor Carl Icahn, which made some people immediately suspicious, but the break-up also seemed illogical in a more fundamental way.

Buying things and paying for them were inherently connected after all, and in general, when it comes to corporations, most people tend to think that bigger is better. What could be gained by separating into two companies? Those doubts were reflected in both stocks over the first year or so, but after a while both PYPL and EBAY began to thrive and both stocks have shown impressive gains since the middle of last year.

Yesterday’s Q3 earnings from PayPal, which showed an impressive beat on both the top and bottom lines, confirmed that the split has been beneficial.

E.F. Schumacher would have been proud. Back in 1973, Schumacher wrote a book called “Small is Beautiful.” It was influential for a while, at least in intellectual circles, where people began to question the rise of the conglomerate corporations that achieved growth through acquisition. Economies of scale and diversification were all the rage after the war, but by 1973 it began to seem that companies could spread themselves too thinly.

Small was big for a while, but by the 1980s and 90s that had been forgotten. By then, size was back in vogue, aided by computer technology which simplified the task of tracking and managing disparate divisions within one corporation.

Perhaps the best, or probably worst, example of that was in banking. Around the world, small banks rapidly became a thing of the past as giant, multinational finance houses bought anything that got in the way of their growth. They were on their way to becoming too big to fail, and nothing would stop them...

We now know where that led, and, as Schumacher noted in his book, “Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius — and a lot of courage to move in the opposite direction.”

These things tend to go in cycles however, and as with most things, it is not as simple as “small good, big bad.” Economies of scale exist, and merging two companies in similar or related fields makes perfect sense in many cases. Indeed, that kind of consolidation is an important driver of the productivity gains that power growth in an economy, but, as the case of the banks show, it can be overdone.

Of course, we cannot know what would have happened to eBay if they had not spun off PayPal, but it sure looks like the move was a success. PayPal is an example of a company that was in many ways ahead of its time. They were the first well recognized digital payments system, and as such a pioneer in mobile payments.

Now that everybody is doing what they have done for years a focused approach to leveraging their experience and market position has definitely helped, and will continue to do so.

These results, then, will not be a one-off. As PayPal consolidate their position, particularly in the rapidly growing mobile payments area, revenue and profit will continue to impress. That makes PYPL a “must own” stock for growth funds and investors, but it also proves once again that small often is beautiful.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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