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Why Honey May Be Worth Its $4 Billion Price Tag

Dan Schulman, president and chief executive officer of PayPal Holdings Inc., speaks during the Montgomery Summit in Santa Monica. Patrick T. Fallon—Bloomberg via Getty Images

After PayPal announced its acquisition of coupon browser add-on maker Honey Science on Wednesday, investors didn’t see a bargain. Shares were down about 1.5% by the end of Thursday.

Shareholders should sit down with a calculator, because this particular acquisition could more than pay for itself within a few years, according to Fortune estimates verified with some analysts who follow the company.

Already making money

In a post-WeWork era—which followed some disappointing 2019 IPOs like those of Uber, Lyft, Slack, SmileDirectClub, and Peloton Interactive—valuations get more scrutiny than they once did. Not a bad idea. But the reaction to the Honey Science acquisition may have be too conservative.

To start, Honey has 17 million active monthly users and works with more than 30,000 online retailers of many types, according to the PayPal press release. Further information forwarded by PayPal said Honey had shown $100 million in annual revenue in audited 2018 results and was growing at more than 100% annually. At that pace, it would hit $200 million this year.

As PayPal chief financial officer John Rainey said on a Wednesday call with analysts and the press, “The company was profitable in calendar 2018 and we expect that this transaction will be accretive to non-GAAP EPS in 2021.”

“Since PayPal is primarily a consumer service, I see the value in combining shopping and rewards with payments, or as PayPal put it, to allow them to participate in the customer’s journey throughout the purchase funnel, from discovery to purchase and payment,” Colin Sebastian, senior research analyst in Internet and interactive entertainment at Robert W. Baird, says in a note to Fortune. “There are lots of ways for PayPal to monetize that, including Honey’s commission model,” which gets rebates from companies and passes some of the savings along to consumers.

Tallying the revenue

“I agree that at first glance $4 billion sounds like large number and 20 times revenue is also large,” says Darrin Peller, a managing director and senior analyst at Wolfe Research covering payments, processors, and IT services. “But when you consider everything, to me that’s very attractive and the data as well is perhaps a bigger opportunity over time.”

A $200 million revenue stream with 17 million active monthly users translates into per-user annual revenue of $11.77, according to Fortune’s analysis. PayPal has approximately 275 million active consumer accounts and the company plans to integrate the new offerings and technology into its platform, which includes both PayPal and Venmo, a payment system heavily favored by millennial users, who are also a target for Honey.

As Peller points out, half of the total user population is outside of the U.S. That leaves about 137.5 million in the U.S. Although it’s unlikely that all, or possibly most, would use the new tools, that still creates an upward bound of $1.6 billion of potential revenue every year.

“I think the upside for PayPal comes in leveraging Honey on its platform and … expanding to the much greater merchant base, as well as geographic expansion, where Honey does not operate,” says Stephen Biggar, director of financial institutions research at Argus Research.

Even gaining 10% of that potential would be an additional $160 million in revenue. It also isn’t the only source of new income. Data is.

As Honey’s technology is based on a browser extension, the ability to gather even more user behavioral data is significant. “A Chrome add-on extension, for example, can easily track if a shopping website visited by a user falls under those partnered with Honey or not,” says Akshay Sharma, a cybersecurity researcher at Sonatype.

Such data is valuable. The European Union Agency for Cybersecurity has estimated that the average revenue per user in digital advertisements reached $59 in 2017. Companies spend significant amounts of money to improve the effectiveness of their targeting.

“The [possible] monetized value for PayPal and Honey is massive,” says Paul Bailo, lecturer at Columbia University School of Professional Studies. “My estimate [of the value of such data] is $100 plus per client.” If correct, that alone raise the revenue as much as $1.36 billion.

The shopping lane

The biggest potential, in Peller’s view, is what he calls a “flywheel.” Honey offers rebates to its users. After integration, these “will likely get deposited into a PayPal or Venmo wallet,” he says, probably additional purchases through the platforms. The ability to direct business through the coupon capabilities into a retailer gives PayPal an opportunity to participate earlier in the purchase process.

Counting on the full revenue potential of any of these new or expanded opportunities is, to be sure, premature. But the numbers suggest a strong potential that the move could add enough revenue to PayPal to more than pay for the acquisition in three or four years.

“If you can combine the two elements of push them to become Honey members and combine that with the other side of Honey enabling a lot more engagement to Venmo and PayPal users, which starts the cycle of spending more, it could be true,” Peller said. “It could pay for itself in a few years.”

Biggar also agreed that while building a valuation from outside the companies is a challenge, the potential is there for the acquisition to return the investment quickly.

That could result in an additional rebate—to PayPal’s investors.

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