PayPal Should Have Visa and AmEx Scared

by Jeff Reeves | August 23, 2012 11:25 am

If you think that eBay (NASDAQ:EBAY[1]) still is just a place to surf for used Atari games or sell your dusty Beanie Baby collection, you’re about 10 years behind the curve.

This e-commerce king has revamped its marketplace so that fixed-price goods — a la Amazon (NASDAQ:AMZN[2]) and other online merchants — represent about two-thirds of sales. Auctions are very much in the backseat.

But more importantly, it appears the whole idea of selling things altogether is becoming less important to eBay’s true growth scheme. That’s because the biggest reason this tech giant has thrived in recent years is because of its successful PayPal operations.

And if you’re Visa (NYSE:V[3]), MasterCard (NYSE:MA[4]) or American Express (NYSE:AXP[5]), you better take notice of just how ambitious the PayPal folks are.

Ebay has expanded into brick-and-mortar payment services with gusto. And thanks to a recent partnership[6] with Discover Financial Services (NYSE:DFS[7]), by 2013 more than 7 million stores across the U.S. will allow you to pay via PayPal. This growth on the business side is complemented by growth on the customer side, too. In its July earnings[8], eBay reported another 13% growth in PayPal accounts to a whopping 113.2 million users, as well as a 26% jump in revenue.

No wonder EBAY stock is up 55% year-to-date to trounce the market, and up 70% since January 2011 vs. just 12% for the S&P 500.

The timing couldn’t be better for PayPal’s surge as the digital revolution continues to upend the old guard in a host of industries thanks to gadgets like the iPhone from Apple (NASDAQ:AAPL[9]) and smartphones and tablets that run the Google (NASDAQ:GOOG[10]) Android operating system. The pain in media — from book publishers to newspapers to record labels — has been clear, as has been the impact on brick-and-mortar retailers[11] like Best Buy (NYSE:BBY[12]).

The payment processor space could be next.

You see, MasterCard and Visa have surged on a “cashless craze” as folks have moved away from paper money and checks to swiping a credit card or typing those numbers into a website for automatic payments. Visa stock has doubled since its March 2008 IPO, even as the S&P 500 has barely treaded water, and MasterCard is up more than 100% in the same period.

Many analysts — including InvestorPlace contributor Charles Sizemore — continue to like Visa and MasterCard because of this marco trend[13]. When you account for the middle class in emerging markets and the move to banks and debit/credit cards … well, it’s an impressive growth outlook.

Except that just as plastic replaced cash, maybe something else will replace plastic in the next few years. After all, digital wallets are being offered from banks, and mobile banking is clearly on the rise[14].

Ebay is undoubtedly the leader in this space.

It’s also a bit of a do-or-die situation for eBay. While it continues to turn a pretty penny on its e-commerce operations, it is becoming increasingly difficult for anyone to compete with the 900-pound gorilla that is Amazon. EBay has tried to entice other retailers to gang up on AMZN[15], and that should tell you everything you need to know.

Going forward, growth investors might want to consider the technological disruption of digital and mobile payments before making a move. And if you like what you see in eBay via its PayPal operations, then consider a buy in this tech giant on a dip. It’s up against a 52-week high — but if past is precedent, PayPal will continue to push eBay even higher as its growth trajectory continues.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[16] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple but no other stocks named here.

Endnotes:
  1. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY
  2. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  3. V: http://studio-5.financialcontent.com/investplace/quote?Symbol=V
  4. MA: http://studio-5.financialcontent.com/investplace/quote?Symbol=MA
  5. AXP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AXP
  6. recent partnership: http://investorplace.com/2012/08/discover-strikes-a-deal-with-paypal/
  7. DFS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DFS
  8. July earnings: http://investorplace.com/2012/07/ebay-more-than-doubles-earnings-in-q2/
  9. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  10. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  11. impact on brick-and-mortar retailers: http://investorplace.com/2012/08/best-buys-not-so-best-quarter/
  12. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  13. continue to like Visa and MasterCard because of this marco trend: http://investorplace.com/2012/07/visa-mastercard-v-ma-credit-cards-emerging-markets/
  14. mobile banking is clearly on the rise: http://investorplace.com/2012/08/digital-payments-pluses-and-minuses/
  15. EBay has tried to entice other retailers to gang up on AMZN: http://investorplace.com/2012/08/ebay-tries-to-entice-other-retailers-to-gang-up-on-amazon/
  16. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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