PayPal still makes eBay (EBAY) a strong buy for the long term. PayPal has introduced some important innovations in the past few months that will make mobile payments easier for consumers. Also, it has made important acquisitions and partnerships that could secure its position as the dominate player in the mobile payments space.
In my previous article on PayPal I wrote about the PayPal labs being a competitive advantage for PayPal. The company has proven me right in the past few months by introducing innovations in both customer experience and financial products.
The first innovation is that of its QR code that will allow merchants to scan a QR code on the customers mobile device to make a purchase. This makes it easy for customers to pay in store for merchandise or services. Many consumers may already have their mobile device in hand at check out and would only have to open an app in order to pay.
The second innovation introduced is called the PayPal Beacon. This device plugs into a USB port at a store that accepts PayPal. By checking into a location app such as Foursquare, the retailer has access to your funds in PayPal. When you are ready to check out, the retailer checks to make sure that the picture on your social media account looks like you and then you complete the purchase. You do not need to pull out cash or a card at all. Admittedly, this would take some getting used to and may need more checks and balances before it is widely adopted but it is still innovative.
PayPal is not just innovating when it comes to technology but also financial products. PayPal has introduced small business loans for its customers. The loans are based on the amount of PayPal sales the business generates. There are no fixed monthly payments or late fees. Instead, the loan is paid back through a fixed percentage of the company's PayPal sales and a predetermined loan fee. With small businesses looking for capital and banks reluctance to loan funds, PayPal may see a new way to capitalize on well established existing customers.
Acquisitions and Strategic Partnerships
PayPal not only has been innovative but has been active in making acquisitions and partnerships that will help secure its place as a dominate player in the mobile payments sector. Most notably its purchase of Braintree which has been used by many app developers to process payments for in app purchases. This is important because it makes PayPal the first choice of app developers. It also has a partnership with Discover card and is being adopted by Samsung for its app store.
Valuation: PayPal Alone Makes eBay a Buy
PayPal makes up 40% of eBay's revenue. PayPal is setting growth targets of between 15% to 18% over the next three years. PayPal also expects a 70% increase in revenue and the number of payments and total payment volume to increase. I believe PayPal will not only hit these targets but also surpass them. eBay's PEG ratio is only 1.22 and I believe is poised to see good growth in its other lines of business. If PayPal alone hits its growth expectation, I believe the stock will hit $61.
The Bottom Line
PayPal is the reason to hold on to eBay for the long haul. It is a strong growth story that is single handedly making eBay a very profitable company. Investors would be wise to add eBay to their well diversified portfolios.