PayPal Holdings Inc (PYPL) Stock Smells Like a Massive Bubble, But …

PYPL is part of a massive balloon in transaction processing driven by potential deals. But what's the real value here?

By Dana Blankenhorn, InvestorPlace Contributor
This Company Could Be the Next Acquisition Target for PayPal Stock

Source: Via PayPal

Paypal Holdings Inc (NASDAQ:PYPL), which hadn’t done much since being spun out of eBay Inc (NASDAQ:EBAY) in 2015, is suddenly a Wall Street darling. PYPL stock is up roughly 50% since the start of the year, and the company’s market capitalization is approaching $70 billion.

PayPal Holdings Inc (PYPL) Stock Smells Like a Massive Bubble, But ...
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That’s more than 6.5 times its past 12 months’ revenue, and gives the company plenty of share firepower to buy another highflier, Square Inc (NYSE:SQ), as at least one Wall Street analyst has suggested. Of course, PYPL’s price-to-earnings ratio has shot up to nearly 50, too.

The moves are not justified by financials.

PayPal is expected to earn just 43 cents per share, on $3.09 billion in revenue, when it reports earnings July 26. Analysts’ whisper number is slightly higher, at 45 cents per share. Still, that’s less than 20% growth year-over-year, and on a small base.

But, as is becoming increasingly commonplace, it’s not the numbers that are driving the stock. Nor is it the Square rumors. It’s not even the fresh fact that you can now buy Apple Inc. (NASDAQ:AAPL) tunes and more with PayPal, nor that New Yorkers soon will be able to pay their fines with PayPal.

This is something more basic. It’s a bubble in payment processing, driven by dealmaking, that is remaking the space under the looming threat of fintech.

Everybody Loves Fintech

Payment processors are a good place to be in the fintech space, trusted, scaled systems that can handle transaction processing. All the major players in the processing space are up this year. Visa Inc (NYSE:V) is selling for nearly 15 times revenue and is worth $222 billion. Vantiv Inc (NYSE:VNTV) — which just announced it will pay $10 billion for Worldpay — at $12.5 billion in market cap is trading at more than 3 times its annual revenue, and is considered cheap!

Even when you’re using a mobile wallet, you still need those transactions to go through the existing credit card system. This is true for Apple Pay, for Google Wallet from Alphabet Inc (NASDAQ:GOOGL), and for a lot of the other mobile players as well.

But to remain relevant, it’s assumed that the processors have to buy one another, or else become bait for banks that sit on the consumer side of the transaction, like Capital One Financial Corp. (NYSE:COF), which has a market cap of $38 billion, or JPMorgan Chase & Co. (NYSE:JPM), with its $328 billion market cap.

Deals between banks and processors could be a big payday.

Wall Street is egging on the group, heedless of the technical complexity putting such companies together entails. Then there is the fact that true mobile wallets like M-Pesa don’t use the banks at all, instead having cellular phone processors handle the back-end, collecting the money at their retail outlets. Could AT&T Inc. (NYSE:T) or Verizon Communications Inc. (NYSE:VZ) wind up taking the prizes?

Buy, buy, buy.

Bottom Line on PYPL Stock

Right now, most of PayPal’s moves show it trying to prove itself in the merchant space, not only finding new merchants like Apple but providing new services for merchants such as helping with international shipping.

These moves, and the company’s growing market cap, make the possible Square deal more appealing, because Square offers merchants banking services like analytics, loans and inventory management that plain processors don’t. These features could be integrated with PayPal’s own mobile wallet.

A Square deal would also bring PayPal into the payments mainstream, instead of outside it like Discover Financial Services (NYSE:DFS), which is trading at just 10.5 times earnings and has dropped 15% of its value in 2017.

My problem is that, with all these deals, real and proposed, no one is looking at the real value of the businesses, nor the complexity of turning deals into on the ground technical realities. PYPL stock and the rest of it smell like a bubble to me.

But this is the time for bubbles, so if you like them, enjoy the champagne. Just remember to get out before the music stops.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

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