PayPal has been a star performer for eBay (NASDAQ:EBAY) with the number of active registered accounts growing from 57 million in 2007 to 123 million in 2012. The company added another 9-10 million accounts in the first half of 2013, taking the total to 132 million.  The number of payments and the total payment volume are also growing thanks to the explosive growth in global e-commerce. PayPal continues to expand its global footprint and is benefiting from increased merchant coverage and higher share of checkout. This means that more customers are buying goods and services through PayPal, and many merchants believe that integrating PayPal has been helpful in acquiring new customers.
However, the growth in mobile commerce is encouraging some of the technology stalwarts such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) to ramp up their efforts of creating or enhancing their own payment systems. One may argue that there is room for multiple players, but PayPal cannot afford to ignore the competitive threat because it dominates the digital wallet industry. The growth of these giants, if it happens, will not come without PayPal losing some share even though the overall market is growing.
PayPal’s Recent Performance Has Been Stellar
PayPal has 132 million active accounts globally, and this figure keeps growing every quarter at an impressive rate. In addition to this, the number of payments made per PayPal account are growing which reflects the global growth in e-commerce. Excluding currency movements, PayPal’s revenues grew by 21% in the second quarter amounting to $1.6 billion.  This can be attributed to 25% growth in the total payment volume, partially offset by a decline in the average payment size which has been coming down in the recent years.  In addition to this, the business also found some support from an increase in its penetration rate on eBay.
PayPal is getting strong support from the growth in mobile commerce, its tie up with Discover Financial services and international expansion. The company has been careful about the local preferences when designing the PayPal Here devices for the individual markets. For example in Europe, it has launched a version of the device that is different from the one in the U.S. In Europe, most credit and debit cards use a chip-and-pin type of authentication, which is more complex than the swipe-based cards that U.S. shoppers use.
However, The Competition May Increase
Consumers are shifting towards digital wallets and mobile payments. They can now walk into a retail establishment and use their smartphones to make purchases and find the best deals to compare the prices with the other stores. The mobile revolution has penetrated many aspects of our personal lives, and the mobile devices are becoming the new focus of advertisers, marketers, retailers and payment service providers. A lot of players including credit card companies, banks, Internet companies and retailers are fighting to get a share of this growing market. The competitive advantage will come from technology, security, user experience and integration across devices.
Google’s mobile payment system, Google Wallet, allows the users to store their debit cards, credit cards, loyalty cards and gift cards. Google can be a serious threat due to its huge mobile reach. This can be attributed to the success of its mobile operating system Android, which has been adopted by several big mobile phone manufacturers such as LG, Samsung, HTC and Sony Ericsson.
Apple is another strong contender and may soon launch its mobile payment system, iWallet. Apple’s advantage lies in its track record of developing sleek and consumer friendly designs, a large and loyal customer base and existing relationships with big retailers and content owners.
Besides Apple and Google, PayPal should also worry about Facebook which has recently been testing an add-on service that fills customers’ billing information automatically while making payments through third party services such as PayPal. While this is a complimentary service, it would be naive to think that Facebook doesn’t have bigger ambitions in mobile payment systems market.
The competition is not just limited to these technology companies. Retail giants such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are also taking interest in the opportunity that lies in mobile payment systems. However, we believe that their efforts will focus more on making it easy for customers to buy their retail goods rather than anything else, and this can be achieved through third party systems as well. Therefore, the overall competitive threat from these retailers will remain on the lower side.
How A Slowdown In PayPal’s Growth May Impact eBay
We estimate that PayPal constitutes roughly 45% to eBay’s value, and has been its strongest growth driver in the recent quarters. If the competition weighs on PayPal’s business, and the payment service is able to add just 80 million more accounts over the next seven years accompanied by slower growth in payments per account, there could be a downside of 20% to our price estimate.
Our price estimate for eBay stands at $60, implying a premium of about 20% to the market price.Notes: