If you’ve ever bought a McDonald’s (NYSE:MCD) Happy Meal for a child, you know the child isn’t really interested in the French fries, the cheeseburger or even the soft drink — it’s all about the toy inside.
Buying shares of eBay (NASDAQ:EBAY) is much the same.
Yes, it’s nice to buy shares in a company that still is making a decent profit on its core business (online sales), but today’s traders really are buying shares of eBay for the prize inside — its exploding PayPal business.
PayPal is taking EBAY from valuations that reflect an e-commerce company that is in its maturity stage to valuations that are more fitting of a growth company just hitting its stride. Not many companies get a second lease on life, but EBAY — via PayPal — is ready to take full advantage of this new opportunity.
PayPal is breaking out of its confines as an online-only payment processing service and is bursting onto the brick-and-mortar scene. EBAY has been talking about making this happen for a while and has been taking small steps by signing up individual retailers like Home Depot (NYSE:HD) and Office Depot (NYSE:ODP) for the service. But the company recently took a gigantic step forward in the process, thanks in large part to a deal EBAY inked with Discover Financial Services (NYSE:DFS).
For years, there were four basic options when swiping a card at your local retailer: Visa (NYSE:V), MasterCard (NYSE:MA), American Express (NYSE:AXP) or Discover. However, according to a deal announced on Aug. 22, you now will be able to pay for your purchase using a PayPal payment card anywhere Discover cards are currently accepted. To put that in perspective, PayPal is going to gain instant access to 7 million U.S. retail locations.
PayPal will issue physical payment cards to its account holders and will be charging merchants a small fee for each transaction. It then will share a portion of the transaction proceeds with DFS. It’s a win/win for both companies involved.
PayPal also is looking to team up with McDonald’s to test a service that would allow customers to order food online, or via a mobile app, and pay for the order using PayPal. Customers then would be able to pick up their food without having to wait in line to order or pay.
The arrangement is slightly different than the deal with DFS because no physical card swipe would be required, but PayPal would be the payment engine nonetheless.
This flexibility of payment options highlights the size of the market PayPal might be able to break into. Getting a foot in the door of the brick-and-mortar payment marketplace is quite a coup, but if PayPal also can secure its spot in the mobile payment universe, it will truly enjoy a triple threat — online, brick-and-mortar and mobile.
If you’re looking for a stock that fits the textbook definition of an uptrend, you don’t need to look any further than the current daily chart of EBAY. The stock has been moving steadily higher for the past 12 months, and it doesn’t show any signs of slowing down.
Click to Enlarge The two gaps you see on the chart — one in April and one in July — were formed after the company released quarterly reports that caused investors on Wall Street to re-evaluate the earnings multiples they were using to value the stock.
Some analysts are even projecting EBAY to climb up to $57 within the next 12 months. If the PayPal/DFS integration goes well, $57 will most likely only be a brief stopping point for the stock as it continues to climb.
Ideal entry for the stock is in the $48 range; while it’s trading slightly above that area now, you can always use bullish call options to get on board the ride up.
If you’re interested in trading options on EBAY to take advantage of the continued climb higher, you need to make sure you give yourself plenty of time before expiration. Don’t get caught with a looming expiration date at the same time you are waiting for a breakout above the neckline.
If you want to decrease the amount of money you have to pay up front for the time value you are buying, you might want to consider entering a bull-call spread with an at-the-money, or slightly out-of-the-money, strike price for the long leg and an out-of-the-money strike price just below or at the target price for the short leg.
John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.