If you weren’t explicitly looking for it, you may have overlooked it. That’s because PayPal (PYPL) didn’t make a point of announcing it. But, for owners of PayPal stock, it could be a big deal if things come together in the right way at the right time.
That “it” here is the funding of U.S.-based online gambling accounts via PayPal.
The company got out of that segment of the market back in 2003, though has continued to facilitate antes and payouts for select overseas gambling sites.
What prompted the return of PayPal to this long-forgotten market — and more importantly, what can those who hold PayPal stock expect from this new initiative?
As it turns out, quite a bit.
Back Into the U.S. Online Gambling Business
As of last week, digital payment middleman PayPal can be used to fund accounts at Caesars Entertainment (CZR) website WSOP.com (World Series of Poker), as well as Derby Games (horse betting) and fantasy sports betting sites FanDuel and DraftKings.
PayPal acknowledges the reinstatement of this aspect of the money-transfer business is strictly a trial run.
On a perhaps-related note of interest to PayPal stockholders, PYPL will only offer these services to people in states where that form of online wagering is legal.
Though most states permit some sort of fantasy-league betting using the hypothetical assembly of a virtual professional sports team using real athletes, the only states where online casino-style games are legal are Delaware, New Jersey and Nevada.
As was noted, PayPal voluntarily abdicated its role as one of the crucial payment processors for the United States real-money gaming industry in 2003 for a couple of reasons, not the least of which was the question of its legality at the time.
But another factor in the decision was a string of fraud that always seemed to stem from its relationships with online gambling venues. Not wanting to disrupt the pending union with eBay (EBAY) developing at that time, PayPal simply decided it would be best served by getting out of the game.
Both kinks were worked out in the meantime. That is, PayPal’s fraud-prevention efforts have become quite effective, while the legality of online gaming has been clarified … even if it has also been limited as a result.
Potential Online Gambling Market
As for what’s at stake for PayPal stock, the correct answer is the obvious one — money.
Just like in the e-commerce transactions it facilitates, PayPal will collect 2.9% of the amount of money it transfers to and from online gambling accounts, plus an additional 30 cents per transaction.
It remains to be seen just how significant this opportunity could be for PayPal stockholders, though so far, it’s not a game-changer.
For perspective, New Jersey’s total online gaming revenue has totaled just a tad over $12 million per month for the past couple of months, implying annualized revenue of roughly $150 million per year.
Nevada’s online gambling rake is, oddly enough, considerably lower, with monthly revenue ranging from $574,000 to $742,000 over the course of the past six months.
The explanation?
New Jersey is more populated, for one, though Nevada’s online casinos are also competing with the sights and sounds of real casinos that are just down the road for most people in the state.
That said, it’s important to bear in mind that the industry’s revenue isn’t the same as the amount of money proverbially put on and taken off of the table.
Assuming a typical, statistical house “edge” of 2%, New Jersey’s likely online gambling revenue of $150 million implies that $7.5 billion worth of bets will be placed in 2015. PayPal’s opportunity in New Jersey, therefore, would be 2.9% of the total amount wagered in that state.
Of course, it’s not as if competitors are simply going to cede to PayPal.
Still, even with this back-of-the-envelope math, the scope is clear.
On that note, there’s little doubt that more states would need to legalize online gambling for this development to bear meaningful fruit for PayPal stock. But, it may be worth the wait and effort.
Morgan Stanley believes the nation’s online gambling revenue could reach up to $5.2 billion per year by 2020 if a few more states that are mulling the idea of legalizing online gambling decide to do so.
Bottom Line
It’s an interesting re-entry into a decent market. And, given enough time, it could prove to be a reasonable money-maker for the company.
But, PayPal was probably right to keep this launch as off the radar as possible. It could take years for the online gambling market to be a major contributor to the company’s top line, which has totaled more than $8.3 billion over the course of the past four quarters.
And, that’s assuming the U.S. online gambling market expands via more legalization … which is still a huge question mark.
In other words, this alone isn’t a reason to own PayPal stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
