There have been few stocks that have performed as well and with as much consistency as MasterCard (MA 0.97%) and Visa (V 1.17%) over the last five years. The stocks are up approximately 266% and 212%, respectively, since 2009.
The reason is simple; consumers are shifting away from cash as a primary form of payment and using an increasing number of electronic methods to pay for goods and services. By MasterCard CEO Ajay Banga's latest estimate,about 50% of consumers in the U.S. and a staggering 85% of those around the globe still use cash or check as a main form of payment.
While the trend is clearly moving in a direction that will continue to benefit the credit card giants, there is another company that is becoming an increasingly powerful player in the space, eBay (EBAY 0.19%). With the success of its PayPal division, which makes up about 42% of the company's total revenue,eBay has become a beneficiary of the large consumer trend toward alternative payment solutions. As such, eBay remains an interesting long-term growth prospect.
A viable competitor to the credit card giants
PayPal is eBay's transaction service that enables consumers and businesses to transfer money in-store, online, and via mobile platforms in a fast and reliable manner, without ever having to exchange financial information. PayPal service is available in approximately 190 markets and 25 currencies, with an estimated 132 million active accounts worldwide.
The growth projections of eBay's PayPal division can best be determined by management's stated expectations for the business segment. In an investor's presentation earlier in the year, CEO John Donahoe projected the company's PayPal division to generate $9.5 to $10.5 billion in revenue by 2015, up significantly from the $5.5 billion the segment generated last year. Conservatively, this means eBay's 'Payments' division is expected to grow revenue 70.43% over the next three years, which equals a compound annual growth rate of 19.98%.
When we compare the projected growth of PayPal and its related services to the growth of MasterCard and Visa, it becomes apparent that eBay's payment service is the faster growing business. MasterCard is expected to grow revenue 11.8% in 2013 and 12% in 2014 while Visa is expected to grow revenue 13.4% and 11.3%, respectively.
Although impressive for large-cap stocks, the two credit card companies are projected to offer significantly slower revenue growth than PayPal going forward. Additionally, based on forward-looking estimates, eBay trades at a significant discount to both MasterCard and Visa. The stock's forward P/E multiple of 17.55 is much cheaper than MasterCard's forward P/E of 22.07 and Visa's P/E of 21.64.
The best of both worlds
The fact that eBay's payments division is still only 40% of the company's total revenue means that there are other aspects for potential investors to consider. As much as eBay is a rising star in payments solutions, the company is still very much tied to its traditional retail/auction business model. The marketplaces division of eBay still accounts for approximately 51% of the company's total revenue, and the impact of this is both positive and negative for investors going forward.
The major negative is that eBay's marketplaces division is growing at a slower pace than the payments division and therefore, is somewhat of a drag on the company's overall growth. Still, investors must recognize the furious pace at which management can and should continue to expand its PayPal service. But ultimately, the company will be held somewhat in check by the slower growth of eBay's traditional auction business.
However, the major positive of eBay's marketplaces division is that the segment has significantly higher margins than that of payments, which is beneficial to the company's overall net income. In the recently reported second quarter, the margin for payments came in at 23% versus the margin for marketplaces of 39.7%.
Another positive for investors is that eBay offers the best of both worlds. The company remains a unique way to play both the positively trending payment solutions segment as well as the powerful retail/auction segment. Both are doing well and the diversification the company provides subsequently lowers overall risk.
Conclusion
eBay is a rare equity in that it provides investors with a chance to capitalize on two powerful consumer trends, the increasing move toward electronic payments and the continued dominance in e-commerce. Compared to the major credit card operators like MasterCard and Visa, eBay, with its PayPal unit, offers faster growth at a cheaper forward valuation level. As such, the stock remains an attractive alternative to traditional payment solutions providers, one that carries significantly less risk.
