Disrupting Markets – Why PayPal Is Worth More Than Ebay

Disrupting Markets – Why PayPal Is Worth More Than Ebay

eBay was once a game changer.  When the internet was very young, and few businesses provided ecommerce, eBay was a pioneer.  From humble beginnings selling Pez dispensers, eBay grew into a powerhouse.  Things we used to sell via garage sale we could now list on eBay.  Small businesses could create stores on eBay to sell goods to customers they otherwise would never reach.  And collectors as well as designers suddenly discovered all kinds of products they formerly could not find.  eBay sales exploded, as traditional retail started it slide downward.

To augment growth eBay realized those selling needed a simple way to collect money from people who lacked a credit card.  Many customers simply had no card, or didn’t trust giving out the information across the web.  So eBay bought fledgling PayPal for $1.5B in 2002, in order to grease the wheels for faster ecommerce growth.  And it worked marvelously.

But times have surely changed.  Now eBay and Paypal have roughly the same revenue.  About $8B/year each.  eBay has run into stiff competition, as CraigsList has grown to take over the “garage sale” and small local business ecommerce.  Simultaneously, powerhouse Amazon has developed its storefront business to a level of sophistication, and ease of use, that makes it viable for businesses from smallest to largest to sell products on-line.  And far more companies have learned they can go it alone with internet sales, using search engine optimization (SEO) techniques as well as social media to drive traffic directly to their stores, bypassing storefronts entirely.

Growth Stall primary slideeBay was a game changer, but now is stuck in practices that have become far less relevant.  The result has been 2 consecutive quarters of declining revenue.  By definition that puts eBay in a growth stall, and fewer than 7% of companies ever recover from a growth stall to consistently increase revenue by a mere 2%/year.  Why not?  Because once in a growth stall the company has already missed the market shift, and competition is taking customers quickly in new directions.  The old leader, like eBay, keeps setting aggressive targets for its business, and tells everyone it will find new customers in remote geographies or vertical markets.  But it almost never happens – because the market shift is making their offering obsolete.

On the other hand, Paypal has blossomed into a game changer in its own right.  Not only does it support cash and credit card transactions for the growing legions of on-line shoppers, but it is providing full payment systems for providers like Uber and AirBnB.  It’s tools support enterprise transactions in all currencies, including emerging bitcoin, and even provides international financial transactions as well as working capital for businesses.

Paypal is increasingly becoming a threat to traditional banks.  Today most folks use a bank for depositing a pay check, and making payments.  There are loans, but frequently that is shopped around irrespective of where you bank.  Much like your credit cards, which most people acquire for their benefits rather than a relationship with the issuing bank.  If customers increasingly make payments via Paypal, and borrow money via operations like Quicken Loans (a division of Intuit,) why do you need a bank?  Discover Services, which now does offer cash deposits and loans on top of credit card services, has found that it can grow substantially by displacing traditional banks.

Paypal is today at the forefront of digital payments processing.  It is a fast growing market, which will displace many traditional banks.  And emerging competitors like Apple Pay and Google Wallet will surely change the market further – while aiding its growth.  How it will shake out is unclear.  But it is clear that Paypal is growing its revenue at 60% or greater since 2012, and at over 100%/quarter the last 2 quarters.

Paypal is now valued at about $47B.  That is roughly the same as the #5 bank in America (according to assets) Bank of New York Mellon, and number 8 massive credit card issuer Capital One, as well as #9 PNC Bank – and over 50% higher valuation than #10 State Street.  It is also about 50% higher than Intuit and Discover.  Based on its current market leadership and position as likely game changer for the banking sector, Paypall is selling for about 8 times revenue.  If its revenue continues to grow at 100%/quarter, however, revenues will reach over $38B in a year making the Price/Revenue multiple of today only 1.25.

Meanwhile, eBay is valued at about $34B.  Given that all which is left in eBay is an outdated on-line ecommerce conglomerator, stuck in a growth stall, that valuation is far harder to justify.  It is selling at about 4.25x revenue.  But if revenues continue declining, as they have for 2 consecutive quarters, this multiple will expand.  And values will be harder and harder to justify as investors rely on hope of a turnaround.

eBay was a game changer.  But leadership became complacent, and now it is very likely overvalued.  Just as Yahoo became when its value relied on its holdings of Alibaba rather as its organic business shrank.  Meanwhile Paypal is the leader in a rapidly growing market that is likely to change the face of not just how we pay, but how we do personal and business finance.  There is no doubt which is more valuable today, and likely to be in the future.

Who’s Got the Money? – Visa, Mastercard, AT&T, Verizon, Discover, Paypal


Summary: 

  • By 2015 or 2020 cash, checks, debit and credit cards could disappear
  • Smartphones are positioned to eliminate old financial transaction tools, as well as land line phone service and PCs
  • All businesses will have to make changes to deal with new forms of payment processing, and early adopters will likely gain an advantage with customes
  • There will likely be some big winners and big losers from this transition

Can you imagine a world with no cash?  It could happen soon, and how will it affect your business?

Bloomberg.com headlined “AT&T, Verizon to Target Visa, Mastercard with Smartphones.”  The business idea is to replace your Visa and Mastercard with a smartphone app that acts as your debit and/or credit card.  Doing this makes it faster and easier for smartphone users to place transactions – online or in person – without even bothering with a card or any other physical artifact.

This is a big deal, because according to Mediapost.comSmartphones Nearly 20% of All Phones Sold.”  So smartphones are starting to be everywhere, and at current rates will replace old mobile phones in just a couple of years.  They are increasingly replacing traditional land-line service as headlined in DailyMarkets.com, “Cell Phone Only Use Hits New High of 24.5% in U.S.” People are abandoning the historical land-line telephone.

The traditional “phone company” and its services are rapidly disappearing. After all the effort Southwestern Bell put in to recreating the old “ma bell” of AT&T, it now looks like that entire business is in decline and likely  to become about as common as CB or portable AM radios.   What is the future of AT&T and Verizon if they front-end Discover as the payment processor?  Will these companies transition to become something very different than their past, and if so what will that be? Or will they be an early proponent for change but let the business value go to others – as they did in mobile phones, ISDN and other internet connectivity as well as cable entertainment?

Mediapost.com also reports “PayPal Making Micropayments a Reality.”  Which gives us the last piece of the puzzle to just about guarantee old payment methods are likely to be gone by 2020 (possibly earlier – 2015?).  People are giving up old land-line telecom for mobile, and mobile is rapidly becoming all smartphones.  Smartphones are getting apps allowing them to conduct financial transactions without the need of a credit card, debit card or (going ultra low-tech) check (no printer needed – lol – which has to be a concern for companies like Zebra that make the printers).  In fact, you can even make all kinds of payments, even really small ones under $1 – not just big ones – using your cell phone by opening a Paypal account.  What you can easily see is a future where you don’t need a wallet at all.  Everything you’ll need for financial transactions will be on your smartphone.  (How much you want to bet somebody will figure out how to put your driver’s license on the smartphone too?)

Ultra convenient, don’t you think? You won’t need a credit card, or any other card.  You won’t need a PC to do your on-line banking.  You won’t need cash for small purchases – you can even do garage sale transactions or buy gum using your smartphone.  And there’s sure to be an app that will consolidate all your payments and set up to automatically do transactions (like your mortgage or car lease) without you even having to do anything.  And all from your smartphone.  No more wallet, no more PC, no more coins or bills in your pocket.

So, what happens to cash registers, and the folks that make them?  No registers in restaurants or hotels?  What happens to desk clerks in hotels – will they be necessary?  What about cashiers in retail stores – any need?  Will banks have any need for a local branch?  Why would ATMs exist?  Quite literally a raft of companies would be affected that deal in the handling of transactions – from Visa and Mastercard to IBM and Diebold.  Even those little printers in cabs could disappear as your phone now pays the cabbie directly what the meter requires.  You could even pay modern parking meters with your smartphone!! What happens to companies that make mens and women’s wallets?  Will purses and clutches disappear from style? How much easier will it be for the IRS to track the income of people that have historically been in cash jobs?

Do your scenarios of 2015 include this kind of change in payments?  Should it?  What will be the impact on your bank?  On your credit card supplier?  Will your customers want to change how they pay?  How will you need to change your order-to-cash process?  Are you  ready to be an early adopter, thus aiding revenue generation?  Or will you let others steal sales by moving quickly to these modern payment systems?

There’s precious little that’s more important in business than collecting the money.  A new set of technologies are sure to be changing how that happens.  Will you leverage this to your advantage, or will your competitors?