Payment processor PayPal, a unit of Best Ideas portfolio holding eBay (EBAY), inked a deal with Discover (DFS) to gain access to its network of merchants. PayPal will now issue cards to its 50 million users in order to perform point of sale transactions at Discover's 7 million+ merchant network. In return, Discover will receive a small fee from PayPal on transaction processing.
It goes without saying that this deal is a step in the right direction for PayPal. However, it is a somewhat shocking admission that perhaps cards will remain the preferred payment solution rather than mobile devices. However, this deal could also be viewed as Discover partnering with PayPal in order to establish a partnership in the mobile payment space.
Recently, McDonald's (MCD) announced it is testing PayPal payments in France to reduce order and wait times, but we're uncertain about the degree of acceptance. We think PayPal still has a long way to go. It has 50 million accounts compared to the billions of Mastercard (MA) and Visa cards (V) in circulation. Still, we like PayPal's potential opportunities.
Ultimately, the PayPal-Discover deal could be an acknowledgement that a hybrid mobile and card model may be the correct method for the industry. Considering that not all cell phone users will make the transition to mobile transactions, there will still be a tremendous amount of users unable to access mobile payment networks. Though we think mobile payment adoption will be relatively fast, it will still take some time. For one, it took a long time for credit card networks to gain widespread acceptance. In fact, some places still only take cash. Credit and debit card payments aren't going away anytime soon, and that's why we're still comfortable holding Visa in our Best Ideas portfolio. The payment processing space is an industry with tremendous growth potential and significantly high returns on invested capital, and we think eBay and Visa are the two best ways to capitalize on these strong industry fundamentals.
All things considered, PayPal's online transaction processing business is growing at a nice clip, and the platform offers users a safe, convenient online transaction system. eBay's fixed-price Marketplace also has been recently competing more effectively with Amazon (AMZN), making the fundamentals of the entire company quite attractive, in our view. eBay scores a rare 10 on our Buying Index (our stock-selection methodology), so we think shares remain incredibly attractive at this juncture.
Additional disclosure: Some of the firms mentioned in this article may be included in our actively-managed portfolios.