PayPal's (PYPL -0.40%) business has arguably been the biggest success story in the fintech space. The company sees more than $1.2 trillion in annualized payment volume and hundreds of millions of users rely on PayPal to move money around. However, in this Fool Live video clip, recorded on Sept. 20, Fool.com contributors Matt Frankel, CFP, and Jason Hall discuss why they think PayPal is not the best place to invest in the fintech space right now.
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Matt Frankel: It's PayPal, ticker symbol PYPL. Listen to some of these statistics when I talk about PayPal, $1.2 trillion, trillion with a T of annualized payment volume. Their total payment volume is up 40% year-over-year, 40% for a business that's doing over $1 trillion of annualized volume.
Jason Hall: That's a business that's been around for two decades.
Frankel: Remember when they were just a little part of eBay (EBAY 0.14%). That's just how you paid for eBay purchases.
Hall: That's back before we knew who Elon Musk was.
Frankel: Right. They're a profitable business.
Frankel: They generated $1.1 billion in free cash flow last quarter, they're expecting over $5 billion for the year. They've been doing some really impressive bolt-on acquisitions. They don't have to dilute shareholders or go into debt to do. They're making money, they can do that. There you go. They acquired Honey the discount shopping app last year. I think they paid five billion for that. They just paid for that out of their cash. They recently acquired a Japanese buy now, pay later service called Paidy for $2.7 billion. PayPal and Square (SQ -1.23%), the two either people always compare very close to each other. I love how PayPal is tackling the buy now, pay later space.
Frankel: They built their own and they're doing bolt-on acquisitions. They built their own buy now, pay later platform to the point where it did $1.5 billion in Q2 alone. It financed purchases for over four million customers last quarter, and now they're adding strategically throughout the world. Paidy is the Japanese leader in buy now, pay later, so now that comes on to PayPal's ecosystem. I really like how they attempt acquisition strategy.
I think Honey was a great acquisition which will turn out to be worth a whole lot more than the five billion or so they paid for it. I think Paidy will end up adding nice incremental value to that buy now, pay later business. If buy now, pay later doesn't turn out to be the big red hot market that everyone thinks it is right now, they're spending $2.7 billion acquiring Paidy, not the 29 billion Square's paying for Afterpay.
Hall: This is the place that you want to see a company make acquisition that doesn't work well.
Frankel: I mean, why did I rank this number seven (of eight)? Probably because I see limited upside potential from this point. If anything. Market cap is over $300 billion already, I mentioned over a trillion dollars of payment volume. Now, to be fair, cashless payment volume around the world is estimated at $185 trillion. They're not going to get all of it. PayPal could easily double or triple their payment volume over the next few years, something like that. But compared to some of the other FinTechs on the list I just see limited upside potential from here. That's really why it got my numbers seven spot.
Hall: Exact same for me. I mean, it trades for about 13 times sales. It's a wonderful business and it's still growing. But it just seems to me that paying that premium for businesses already that large, I think, it's a bit of a stretch for me.