The consensus among market analysts is that PayPal is worth significantly more than eBay Inc. (EBAY). Even as a part of eBay, PayPal accounted for approximately $40 billion of eBay's total market capitalization of $70 billion. One of the driving factors behind the PayPal and eBay split is the belief that PayPal's value will increase substantially higher as a standalone company. One of the projections for PayPal's ability to double in value envisions the company transforming itself into essentially an online bank.
It's estimated that PayPal generated nearly all of eBay's net income in 2013. Using that $2.3 billion figure as a projected earnings figure for PayPal as an independent company with a market cap of $40 billion would translate into an attractive price-earnings (P/E) ratio of just 16 for a company that has been sustaining a 20% annual growth rate in a market sector that is expected to continue its fast growth.
PayPal's Business Model
PayPal is an online payment processor. It also provides a prepaid debit card service in partnership with MasterCard. It operates much like a credit card company, such as Visa or MasterCard, by providing a means of payment, but its unique value proposition is the anonymity it provides, protecting its customers' credit card or bank information.
PayPal was originally developed to enable customers to feel safe in conducting transactions online in a marketplace such as eBay where the sellers and buyers do not know each other. Its primary source of revenue is a 3% transaction fee that it takes from the seller's side of transactions; this constitutes a much higher than average profit margin for a payment processing service.
PayPal only collects all of that 3% if customers pay for items directly from funds in their PayPal account, rather than using a credit card and using PayPal merely as a pass-through service. Therefore, it would be to PayPal's major advantage to provide an incentive for customers to maintain significant cash balances in their PayPal accounts.
The most readily apparent solution for PayPal would be to transform itself into an online bank by offering all the traditional services that a retail bank does, such as direct deposit, checking services and paying interest on cash balances, possibly in the form of money market accounts. It would not be a difficult transition for PayPal to make. Analysts point out that as a purely online banking service, without the costly overhead expense of maintaining physical branches, PayPal would likely be able to offer attractively high interest rates and attractively low banking fees.
An Increasingly Competitive Marketplace
The idea of PayPal transforming itself into a complete online banking service is appealing to the company for another reason. As an online payment processor, PayPal is operating in an increasingly competitive marketplace, going head to head with such corporate giants as Google, Amazon and Apple. Google Wallet already provides a payment service to Android users, and it has recently entered into a partnership agreement with MasterCard, providing access to millions of retail stores worldwide. Apple has introduced Apple Pay, and Amazon is linking a similar payment processing service to its Kindle. All of these entries chip away at PayPal's dominant position in online payment processing.
A Possible Buyout Target?
PayPal's current value, along with optimistic projections for its future growth, may make it an attractive buy to another firm. One obvious potential buyer, according to analysts, is Google, which might prefer to buy up the competition to Google Wallet. Another potential suitor mentioned is Alibaba, a rapidly growing e-commerce business that should be flush with cash from its initial public offering (IPO).