Seeking Alpha
Long/short equity, growth at reasonable price, research analyst, deep value
Profile| Send Message| ()  

Just about every day, a company releases news regarding the mobile payments area. Unfortunately for investors with only access to the public markets, the news tends to be from a private company and more importantly, the focus is usually on Square.

For investors, a few opportunities exist via PayPal, a division of eBay Inc. (EBAY) and Intuit (INTU). See original article from April regarding the different investment options. PayPal appears to have the best plan, but do investors get enough exposure from an investment in eBay with a market cap of $64B?

PayPal Q2 Highlights

The company reported the following Q2 highlights for the PayPal division:

  • Revenue of $1.36B, or an increase of 26% from last year.
  • Payment volume increased to $34.4B from $28.7B, up 20% year-over-year.
  • Number of payments increased to 564.8M from 432M last year.
  • Active registered users increased to 113.2M from 100.3M, up 13% year-over-year.

PayPal revenue accounted for roughly 40% of total eBay revenue. At 26% revenue growth, it clearly places the division as the driver of growth within the company. The main Marketplaces division is only growing at 9%.

Mobile, though, remains a small fraction of that revenue base. It expects roughly $10B in mobile volume in 2012 for each PayPal and Marketplaces. That makes the mobile payments part of PayPal less than 10% of the total volume.

Stock Valuation

The eBay stock has seen considerable gains since the April article. As mentioned, the company now has a valuation of $64B. It trades at an expensive valuation to its growth rate even counting the fast growth of payments.

Another concerning situation is that the free cash flow has weakened in the first half of 2012. In fact, the free cash flow basically peaked in Q4 2010, suggesting the underlying situation might not be as good as the revenue growth suggests.

The forecasted free cash flow for 2012 is around $2.45B, making the stock valued at 26x those estimates.

Sector Developments

Square is now handling $8B in payments a year, up from $4B back in April when we initially wrote about this sector. The company also announced raising $200M in a new round of funding. The deal reportedly values the company at $3.25B.

With similar mobile payments processed, this values the PayPal mobile transactions at just over $3B or 5% of the company.

This week, Groupon (GRPN) announced the launch of Groupon Payments. The company will offer a mobile card reader that uses an app on the iPhone or iPod to enter the space. It hopes to expand on the daily deals service already provided to retailers by offering the lowest cost for payment services.

Groupon is offering three main rate structures:

  • Swiped transactions - MasterCard (MA), Visa (V) and Discover (DFS) (1.8 percent plus 15 cents) and American Express (AXP) (3 percent plus 15 cents)
  • Keyed-in transactions - MasterCard, Visa and Discover (2.3 percent plus 15 cents) and American Express (3.5 percent plus 15 cents)
  • Non-Groupon merchants can also sign up for the service, however, they will be charged slightly more (2.2 percent plus 15 cents for MasterCard, Visa and Discover)

The potential of this offering actually makes Groupon the most interesting investment idea in the mobile payments space. At a market cap of only $3.5B, the stock is actually only slightly more expensive than the reported value of Square.

Conclusion

The PayPal division of eBay remains an interesting growth story in both payments and especially the mobile payments arena. Unfortunately the potential value of the mobile transactions division is too small to invest in eBay for that reason.

Groupon is too early on in the mobile payments development process to tell whether this concept will work. Not to mention, by providing the lowest fees will the service even be profitable. The company after all is known for offering deals and providing a "Groupon" to customers for credit card processing might not be the best way to make money.

For now, the mobile payments sector promises a lot of growth, yet investors in general are left with nothing more than promises.

Source: PayPal: Huge Mobile Payments Growth Remains Buried

Additional disclosure: Please consult your financial advisor before making any investment decisions.