Since being launched in March 2020, Solana (SOL 1.78%) has generated a monster return for investors, rising more than 16,000%. That performance is certainly impressive, even though the cryptocurrency is trading 44% below its all-time high today.
However, the gains can draw attention away from the fact that this blockchain network is working on an innovative new feature that looks promising. To be more specific, Solana is aiming to disrupt the payments space.
Can this cryptocurrency make some serious progress and become the next PayPal (PYPL 1.37%)?
Trying to change the payments landscape
CRYPTO: SOL
Key Data Points
Solana Labs, the company that essentially controls the decision-making and development efforts for Solana, is trying to boost the blockchain's long-term viability. It introduced the Solana Pay service in early 2022 to make inroads in the payments industry.
Solana Pay is an innovative payment mechanism that connects merchants and consumers directly via the blockchain. Transactions can be facilitated using the SOL token or a stablecoin and can settle almost instantly with fees that are fractions of a penny.
For merchants that operate on razor-thin margins, using Solana Pay could lead to higher profits, because there would be meaningful savings from the money that doesn't get paid to traditional payment processors. Moreover, exciting features, like non-fungible tokens, can replace receipts, allowing customers and businesses to develop deeper connections and to encourage future transactions to occur.
Solana says there are 280,000 active Solana Pay accounts. It's unclear whether this specifies the number of merchants that have signed up or the total number of merchants and potential shoppers. Nonetheless, it's clear that this is still a very small user base in the grand scheme of things, as there are tens of millions of retail merchants around the globe.
Solana stands out in the digital asset industry due to its fast throughput. It can theoretically handle 50,000 transactions per second. This makes it a prime candidate to be used in a payments setting.
It also helps that the industry is very lucrative. PayPal executives believe the business will generate $6 billion in free cash flow (FCF) this year. And the two card juggernauts, Visa and Mastercard, rake in tens of billions of dollars in FCF each year.
PayPal's long-term success
NASDAQ: PYPL
Key Data Points
As of this writing, Solana's market cap of $68 billion is just slightly lower than that of PayPal, which is worth $75 billion. Therefore, I can say that the former has already become the latter in terms of approximate valuation. But this says nothing of utility. I'd suspect Solana's gain is due mainly to hype, speculative activity, and the extremely favorable market environment than anything having to do with fundamental developments.
To give it credit, Solana announced in August that it would integrate with the popular Shopify e-commerce platform. Since that point, the crypto is up 600%, a fantastic gain in a year's time.
But according to Cryptwerk, Solana's token is only accepted at 737 merchants worldwide. To say that Solana has a long way to go to gain the adoption and usage PayPal has would probably be a major understatement.
That's especially true when you take a closer look at PayPal, which is used in 200 countries. The business processed $1.7 trillion in annualized payment volume last quarter, and it has 429 million active users. Its status as a trusted and seamless way to move money shines brightly when compared to the numerous outages the Solana network has had. Consequently, I'm not confident the crypto can ever become the next PayPal.
If you looked at PayPal's stock chart, with shares trading 76% off their peak, you'd think the business was on the verge of bankruptcy. But that couldn't be further from the truth.
It's true that PayPal isn't putting up the monster growth numbers it did in years past, but that's not a deal-breaker. It's still expanding, which is encouraging, and it's a very profitable business.
Plus, PayPal's stock is cheap. It can be purchased at a forward price-to-earnings ratio of just 16.3. I view Solana as being severely overvalued, while PayPal looks drastically undervalued. It's clear that the fintech enterprise is the much better investment to make right now.
