PayPal’s Path To $100 Billion?

Two PayPal execs have been quoted saying that PayPal could top a market capitalization of $100 billion. A Motley Fool writer, though, ran some calculations and concluded that the only way this makes sense is if PayPal intends to become a true processor. An idea, by the way, which could make a lot of sense, he wrote.

The writer, Brian Nichols, argues that the cited number can’t work in the current reality.

“Based on PayPal’s current fundamentals and business model, it would be near impossible to justify a $100 billion market capitalization. PayPal has grown revenue by 19 percent during the last 12 months, to $7.2 billion. PayPal’s operating margin last year was 24 percent, so on $7.2 billion of revenue, PayPal would trade at nearly 60 times 12-months operating income,” he penned. “While not absurd by today’s technology standards, 60 times 12-month operating income is quite pricey when you consider the rise of Apple Pay, Amazon Payments, and others. Visa, another company in the payments business, trades at just 17 times 12-month operating income, creating a wide disconnect between it and PayPal, and making $100 billion rather absurd.”

Then there’s that processor idea.

“Apple will reportedly earn $0.15 per $100 spent via Apple Pay from transaction processors like Visa and Mastercard, but PayPal earns its revenue by collecting fees from consumers or merchants using its service. While the fee varies depending on the service, PayPal’s traditional core service of sending and receiving cash online is around 3 percent of the monies transferred. The problem for PayPal is that it only collects the 3 percent fee when users either have money stored on PayPal, or bank information tied to the PayPal account. When using a credit card, Visa, Mastercard, and others alike receive the 3 percent fee, which PayPal, as the vendor, is responsible to pay,” Nichols wrote. “In other words, PayPal is losing a lot of money by having to pay the likes of Mastercard and Visa when credit or debit cards are used for payments. This brings about the possibility of PayPal becoming an actual transaction processor, rather than an aggregator, or a platform for transferring currency. Essentially, this move would mean that PayPal would operate like Visa and Mastercard, but through an online model.”

An interesting scenario, especially when it would mean that PayPal would have a very different relationship with players like Apple and Amazon. It might put the PayPal spinoff into a different context.