- Like American Express and Discover, Paypal stock is down.
- Paypal stock is priced higher than these rivals.
- Paypal faces the same challenge with fewer assets.
The assumptions are that electronic payments are growing, and thus Paypal must get a big share of it. But Paypal is not in the payments mainstream, represented by Visa (NYSE:V) and Mastercard (NYSE:MA) brands.
All companies that are outside that mainstream have suffered this year. Discover Financial (NYSE:DFS) is down 17.5% this year. American Express (NYSE:AXP) is down 24%. Paypal’s losses, just 3%, are minimal by comparison.
Paypal is also greatly overvalued compared to these other players. American Express and Discover have Price/Earnings multiples in the low teens. That of Paypal, by contrast, is 37.
Despite its high P/E, Paypal is not a fast-growing company. Its revenues for the last three quarters are $2.1 billion, $2.3 billion and $2.25 billion. Operating income was $322 million for the first quarter, $330 million for the third. The balance sheet is strong, the company’s debt having been paid off this year, but for a bank debt is an asset. Paypal, unlike its rivals, is primarily a processor.
Paypal’s chief advantages are its low cost (which limits how much it can earn) and its mobile app, but the latter is now facing increased competition from the mainstream, apps from bigger companies and direct access to Visa and MasterCard networks, from Apple (NASDAQ:AAPL), Alphabet Inc-A (NASDAQ:GOOGL), Samsung Electronics (OTC:SSNLF) and Walmart (NYSE:WMT). Paypal can be connected to those networks, but the connection is klunky.
This leaves Paypal with the low end of the payment market. There is a reason why Paypal is talking up Africa and spending millions to advertise on the next Super Bowl broadcast -- it just doesn’t have much market share.
Paypal has the potential to make millions as an international bank, and it is planning an entry into India, but it denies that it is a bank and it has no banking charter. But this does not keep it from facing issues with regulators as it tries to expand its global footprint.
Like everyone else in the payment space, Paypal also has security issues but it lacks the financial heft to tackle them as effectively as mainstream processors.
Paypal is basically a story about potential, about what it might do. It’s not a story about what it’s doing. Paypal is, at best, a speculative payments play at its current valuation, one with fewer assets to play with than rivals like Discover and AmEx, but just as many challenges.