Will This Company Dominate?

By William Bias - August 16, 2012 | Tickers: AXP, EBAY, MA, V | 0 Comments

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As I was looking at eBay’s (NASDAQ: EBAY) latest quarterly report I noticed stellar growth in their PayPal division’s revenue. For six months ending June 30, 2012 PayPal’s revenue grew 27% to $2.5 billion. Between 2006 and 2011 PayPal’s revenue grew 23% annualized. Comparing PayPal’s portion of eBay’s revenue to credit card companies (see table below) I can’t help but wonder if PayPal won’t come to dominate the payment transaction sector.

*Visa has 9 months in FY 2012, but for comparability I used a March 31 figure which was their fiscal half year.

(1) Source Company Form 10-Qs

(2) Source Yahoo! Finance

MasterCard and Visa, iconic names, are trading at high valuations. eBay’s P/E ratio is the 2^nd cheapest one on the list in the table. American Express (NYSE: AXP) is a well known brand name as well and may also be worthy of investment, but I think that PayPal has some advantages that will eventually make it a dominant player in financial transactions.

The Pal that is PayPal

One of the key drivers behind eBay’s growth is the security that PayPal has to offer from a buyer and seller standpoint. PayPal can link to a debit card, credit card or a checking account. This is a big advantage. I wanted to buy some tickets to a sci-fi event from a certain website that I wasn’t too keen on trusting my credit card information to. The website gave me the option of billing to my PayPal account which in turn charged my credit card. I didn’t have to give a website that I didn’t fully trust my credit card information, and I was still able to get the tickets I wanted. PayPal allowed me to purchase the tickets with a little more peace of mind.

I have used PayPal through its parent company eBay to both buy and sell. I really didn’t feel comfortable giving someone I never met my debit card information on eBay when I wanted to buy something. I also felt good when I was trying to sell something on eBay that my customers didn’t have to sweat bullets over their transaction being compromised.

A new interesting use for PayPal came to my attention when I bought a ream of paper from Staples. When I signed up for a rebate I had the option of receiving the rebate through my PayPal account. This gave me the added convenience of receiving my rebate electronically without having to go to the bank to cash a check.

PayPal also allows people to transfer money from one person to the next. Fees are charged in certain instances. The sender can decide whether to pay the fee or pass it on to the receiver.

For Those Who Don’t Accept MasterCard There’s PayPal

When one hears the name MasterCard, Visa, or American Express one thinks of credit card transactions. As PayPal becomes more versatile in their uses they will become more synonymous with “secure” transaction. The ability for someone to bill PayPal allows for a bit of anonymity that doesn’t exist when one simply uses their credit or debit card. As e-commerce becomes more and more mainstream the ability to safely transact with random people all over the globe is going to become increasingly relevant. PayPal along with the eBay marketplace and GSI e-commerce platforms stand ready to become the recognized name for safe transactions in e-commerce.

Conclusion

The security features of PayPal and the versatility of its uses, such as the ability to transact safely online, combined with the fairly low valuation of PayPal’s parent company, eBay, make it worth watching. I will continue my due diligence and may invest if the fundamentals are right. PayPal is going to be a name more recognized then Visa or MasterCard.

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