Customers have many different ways to pay online. And that means there's a growing number of companies that can take away market share from PayPal (PYPL -2.62%), which over the years has been a top option for transferring money online.
One of PayPal's largest competitors may not be here yet, however. A looming risk investors need to be wary of comes from Elon Musk's X.com.
Why X.com can be a huge threat
Musk helped make PayPal what it is today and is credited as one of its founders. While he's known for developing electric vehicles and rockets, he also has a background in finance and even interned at one of Canada's top banks in the '90s -- Bank of Nova Scotia.
One area that continues to be of particular focus for him is finance and banking. Although it doesn't sound as exciting as self-driving cars or sending people to space, it's a huge opportunity, especially since he wants to build an all-in-one app.
Today, X.com is a social media site, formerly known as Twitter. But Musk has much grander plans for the business beyond that.
People will soon be able to use X for their finances
According to a recent report from The Verge and based on audio it obtained, Musk wants to develop a platform that will be much bigger than just transferring money between individuals. He says people will be able to have their "entire financial life" on the platform. And the opportunity is not far away, with Musk also stating, "It would blow my mind if we don't have that rolled out by the end of next year."
Musk has long wanted to create an "everything app" similar to China's WeChat, which people can use to send messages, transfer money, and order cabs.
It may be tempting to dismiss Musk's goals, given the potential regulatory hurdles of having everything in one place, or even pointing to X's struggles since Musk took over, with it losing half of its valuation since then, as evidence as to why his vision won't pan out.
But Musk has proven he's not a person to be taken lightly. There were doubters about SpaceX and Tesla, and he has been able to prove his naysayers wrong. His knowledge of PayPal and its inner workings and shortfalls give him excellent insight into what could make a new payment platform even better for consumers.
Another large competitor could make growth difficult for PayPal
PayPal's growth rate spiked during the early stages of the pandemic while consumers were spending heavily, but it has fallen sharply in the past year and is now well below its long-run average:
PYPL Revenue (Quarterly YoY Growth) data by YCharts
The company is already competing against Apple Pay and Alphabet's Android pay. There is plenty of competition out there today, and with another possible formidable rival on the way in X.com, PayPal could find it even more difficult to generate strong revenue growth in the future.
PayPal remains a top payment platform today, but investors shouldn't ignore the challenges it is facing. And that's a key reason why the growth stock is down 24% this year. The good news, however, is that the business is still highly profitable, with PayPal reporting a profit margin of 14% in its most recent quarter, which ended on Sept. 30.
Is PayPal stock a buy?
PayPal has been a big name in online payment processing for years, and that reputation can help it fend off new rivals such as X.com. Trust doesn't come easily on the internet, especially when it comes to finances. While Musk's goals are ambitious, they are often aggressive, and delays are by no means unheard of when it comes to his targets.
Although X.com could be a big rival for PayPal down the road, it's far too early to know how successful it will be or how long it may take for it to potentially steal market share away from PayPal. This is a threat that investors shouldn't worry about too much just yet, but it's one that you should be aware of if you're planning to invest in PayPal.
Trading at just 10 times its estimated future earnings, PayPal remains a deep value buy for long-term investors. While it may not be a buy-and-forget stock, this can still be an investment that generates great returns in the future.
