PayPal Holdings Inc. Has the Smell of Musk in Payments

Paypal - PayPal Holdings Inc. Has the Smell of Musk in Payments

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Here’s an interesting piece of trivia: Elon Musk did not found Tesla. But he did co-found the company that later became Paypal Holdings Inc. (NASDAQ:PYPL).

When eBay Inc. (NASDAQ:EBAY) bought Paypal in 2002 for $1.5 billion, Musk’s net was $165 million.  The rest, as they say, is history.

But maybe not the kind of history Musk might like you to remember. Since eBay spun-out Paypal in 2014 it is up 56%, while Tesla Inc. (NASDAQ:TSLA) is actually down 5.6%.

Paypal today is the hottest thing in the payments business not named Square Inc. (NASDAQ:SQ), and has now pledged to follow Square on the acquisition trail, spending $1-3 billion per year in acquisitions, financed in part by selling its receivables to Synchrony Financial (NYSE:SYF), once part of General Electric Co. (NYSE:GE), for $6.9 billion.

Look to India

What Paypal and Square are both doing is riding the fintech boom — the idea that payments are about to be reinvented, possibly by blockchain technology, and that old-style banks, brokerages, even payment networks like Visa Inc. (NYSE:V) are doomed.

No, not just doomed, D-O-O-M-ED!

In the last year, Paypal has bought five companies. The largest, iZettle, is called the “Square of Europe” and cost $2.2 billion. 

Most were much smaller, like Semility, a fraud-detection company, Jetlore, which does predictive analysis for retailers, and HyperWallet, which cost $400 million and pays off people in the gig economy.

Paypal is looking for global businesses, even if they’re in small niches, with hopes of quickly becoming a global lender and payment hub. That’s great conceptually, but difficult to execute. To help, the company is hiring Indian engineers as fast as they can, having doubled employment in Chennai and Bangalore in just two years.

India means more than just low costs for Paypal. It may be the hottest payments technology market in the world, thanks to government support and its decision to eliminate big bills, leading to the creation of phone-based payment services like Paytm and a host of competitors.

The Down Side

The focus on India is a double-edged sword. Indian engineers may be cheap, but they are also entrepreneurial, meaning there is always a risk of losing your best people. The same goes double for managers.

Then there’s the fact that you’re paying very high multiples on promises. Paypal’s revenue growth stalled in the March quarter, with revenue and net income both down from a year ago. Paypal’s free cash flow has been slowing lately, and it’s trading the sure thing of receivables profits for the not-so-sure thing of global growth.

So far, this is not a problem. Paypal has a market cap of $102 billion as of July 9, and a price-to-earnings ratio of over 54. It sells for over 7.5 times sales. But Visa sells for over 10 times sales, and Worldpay Inc. (NYSE:WP), a traditional processor, has $4.5 billion in revenue and $26 billion in market cap.

The Bottom Line on PYPL Stock

I called Paypal a bubble stock a year ago and the bubble has only gotten bigger since.

When I made that call, Paypal was selling at 6.5 times its revenue. It’s even higher now.

The market’s assumption is that fintech is about to transform the world of money, but not everyone is going to be a winner. Paypal may yet turn out to be one of those winners. It’s betting heavily that it can be.

But there are also going to be losers. When you buy Paypal today, you’re taking on enormous risk and expecting big rewards. How much bigger can the payments bubble get before it pops?

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 owned no shares in companies mentioned in this article.

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