PayPal Holdings (PYPL) has slightly underperformed the NASDAQ since its split from eBay (EBAY).
Still, PayPal stock seems to be holding steady as investors wait to see what moves a new board of directors and new management will make with PayPal as a standalone company.
However, those expected changes can’t stop new competition, and with PYPL down 6% since its split, now is a good time to sell PayPal stock before those losses accelerate.
How’s PYPL Performing?
In PayPal’s third quarter, its revenue rose 14.7% to $2.26 billion while operating expenses rose just 13% to $1.98 billion. Therefore, PayPal saw some margin improvement, helping it beat EPS expectations and earn 31 cents per share.
While good, EPS and revenue aren’t the two metrics closest watched by PayPal stock owners. Instead, it is PYPL’s payment volume that’s so important, as that indicates market share and, ultimately, how PYPL is poised to perform in the future.
During that third quarter, payment volume increased 20% to $69.7 billion. Further, mobile payment volume was the biggest growth driver, seeing a 42% increase year-over-year to account for one quarter of PYPL’s total payment volume.
While this may seem good, Amazon.com (AMZN) recently reported that its competing third-party mobile payment service “Pay with Amazon” has grown in transaction volume by 180% this year.
The Big Problem for PayPal Stock
Therein lies the problem for PYPL, and the big reason I would not buy PayPal stock.
Fact is, PayPal had a big jump on Amazon in the payment space, and especially in mobile payments. However, Amazon is making a big push in this arena, and its transaction volume growth in mobile is mindboggling.
Ultimately, PYPL still relies largely on eBay’s Marketplace users for the majority of customers. PayPal’s 173 million active customers aren’t much more than eBay’s 159 million, and are far less than the 294 million active users that Amazon has at its disposal.
The bottom line is that PayPal may remain the preferred third-party payment service for eBay, but gaining long-term market share outside of Marketplace is unlikely.
PYPL Threats Beyond AMZN
Amazon is a huge threat to PayPal’s-fastest growing segment, and its broader payments business, but the threat does not end there. PYPL faces a slew of new competition from Apple‘s (AAPL) Apple Pay, Alphabet‘s (GOOG, GOOGL) Android Pay, Stripe and company-owned payment services from the likes of Starbucks (SBUX) that diminish its market opportunity.
This new competition suggests that PYPL will fail to find growth outside of eBay for too long, especially as competitors penetrate the mobile payments space.
With that said, PayPal stock is the only pure play on mobile and online payments. It is also the largest, with the least amount of market share upside, and also has the smallest ecosystem relative to Amazon.com, iOS or Android.
At 25 times fiscal year 2016 earnings per share, it’s also very expensive to own this pure play, and when combined with Amazon’s newfound success and the laundry list of other large competitors to recently enter the space, PayPal stock does not look like a good investment opportunity.
As of this writing, Brian Nichols owned shares of Apple.
