In 2002, eBay (NASDAQ:EBAY) acquired PayPal for $1.5 billion, a "modest" 15 percent premium based on Paypal's July 2002 stock price. At the time, PayPal was used primarily as a means for eBay buyers and sellers to exchange funds for online auctions. Still, the service accounted for only 25 percent of eBay's closed auction payments.
Fast-forward 11 years, and PayPal has become a global e-commerce payments provider, allowing more than 128 million active users to do business with hundreds of online merchants outside of eBay. In 2012, the service accounted for $175 billion in commerce. And here's the kicker: Remember the $1.5 billion price eBay paid for PayPal? Well, revenue from PayPal matched that figure in Q1 2013 alone.
Now, Paypal is expanding its presence in the offline marketplace, as well. On April 19, PayPal's partnership with Discover (NYSE:DFS) officially kicked in, meaning that by the end of the year, PayPal users will be able to pay with a PayPal card, via mobile device, by check-in or by entering a phone number and a PIN at roughly 2 million stores currently accepting Discover.
These retailers currently include Abercrombie & Fitch (NYSE:ANF), Dollar General (NYSE:DG), Foot Locker (NYSE:FL), Home Depot (NYSE:HD) and J.C. Penney (NYSE:JCP), among others. Last month, PayPal announced a partnership with RadioShack (NYSE:RSH) that brought Paypal into all 7,000-plus of the retailer's stores. And by the end of the year, additional merchants such as Burger King (BKW), Sephora and Brookstone will be accepting PayPal in stores.
PayPal's agreement with Discover is significant not only for the impact of the retailers immediately added to the PayPal network, but also for the benefit of the clout Discover has with more than 1,500 of the largest retailers in the U.S. Discover has been negotiating with these retailers to accept PayPal, and recently signed Nordstrom (NYSE:JWN) to accept PayPal in-store payments.
It also appears that Discover and PayPal are aiming high by negotiating with big-box chains such as Wal-Mart (NYSE:WMT). However, a Wal-Mart spokesman recently told Reuters, "The added complexity at the point of sale does not justify acceptance of PayPal." However, Wal-Mart has previously shown willingness to work with PayPal by accepting it as a form of payment on walmart.com. If the stumbling block is ease of use at checkout, as the Wal-Mart spokesman claims, expect PayPal and Discover to work on making PayPal checkout more streamlined and user-friendly to satisfy high volume retailers like Wal-Mart.
eBay certainly appears to be optimistic about the prospect of PayPal's growth. Last month, PayPal opened a new data center, increasing its IT capacity by one-third to support its growing business. At least one analyst, Gil Luria of Wedbush Securities, saw the move as a sign of optimism for things to come: "PayPal could stretch their existing IT capacity or rent extra capacity, but they have the confidence to build a whole new data center."
And PayPal president David Marcus announced the company will increase marketing later this year to support its move into physical stores. However, Marcus also noted the potential issue of convincing consumers to abandon their decades-old habit of swiping a credit or debit card to pay for a retail transaction. To that end, PayPal recently revealed the results of a survey of debit or credit card holders across five countries. An overwhelming majority (83 percent) of respondents said they wished they didn't have to carry a wallet; 29 percent of Americans surveyed said they would choose a smartphone over a wallet if they could only choose one item to take with them when they go out. And more than two-thirds (68 percent) of American respondents said they have been in a situation where they couldn't pay for something because they didn't have cash on them.
eBay currently trades at $54.10, based on the 5/31 closing price. The trailing P/E is 26.26, which might seem high, but is comparable to Google (NASDAQ:GOOG), which trades at 26.07 times earnings, and relatively modest compared to Overstock.com (NASDAQ:OSTK), which trades at a 31.57 P/E.
Analysts expect eBay to earn $3.23 per share next year, which amounts to a very attractive 16.75 forward P/E. The company is also expected to grow earnings at an annual 15 percent clip over the next five years. Assuming an average P/E in the range of 16, that would put eBay's value around $90 by 2018, a 66 percent gain on the current price.
eBay and PayPal have been at the forefront of e-commerce payments and the mobile e-commerce revolution. As I've stated before, I believe the growth we've seen in PayPal thus far is only the tip of the proverbial iceberg.
PayPal's foray into offline payments in retail stores might not work out in the long run. But its history of growth and innovation, along with its 128 million strong user base gives the company a distinct advantage over any of its current online competitors.
Disclosure: I am long EBAY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.