A close look at PayPal
Posted
Jun 25 2008, 02:21 PM
by
Kim Peterson
PayPal is a shining star within eBay, and a reason to buy the stock at its cheap price. The online payment service has grown fast since eBay bought it for $1.5 billion in 2002. Now you can use PayPal to buy airline tickets, rent movies at Blockbuster and pay bills. PayPal is used for about 12% of all online payments in the U.S. (Click here for a breakdown of PayPal's fees).
Still, I wonder how well PayPal fits these days within eBay, a company that has been distracted by policy changes, user complaints, changing management and a strategy overhaul. EBay certainly has made PayPal what it is today, but are eBay's struggles limiting PayPal's potential? EBay shares rose less than a percent today to $28.16.
Let's look at the numbers. PayPal's revenue was $582 million in Q1. That's roughly a third of what eBay brought in from its auction business. But PayPal revenue grew at 32% -- much faster than the 19% growth in eBay's marketplace segment. (EBay's third segment, Skype, posted $126 million in revenue and 61% growth).
The red flag with PayPal is its margins. In Q1, PayPal's margin was 15% compared to 40% for eBay's marketplace segment. PayPal makes almost no money on credit card transactions. So to boost its margins, PayPal discourages credit card use and offers 1.5% cash back on bank transfers or PayPal balance transfer.
As PayPal continues to grow, it will put more pressure on Ebay's overall margins. It was partly because of PayPal's success that eBay's margins in the first quarter fell to 32% from 33.6%.
Another challenge PayPal faces is new competition. A Cantor Fitzgerald analyst thinks Amazon is prepping a "PayPal-esque payments service" that can be used across the Web, not just within Amazon's own site. Amazon already has a clunky version of this service, called Amazon Payments. Perhaps the biggest threat to PayPal is Google Checkout, but Google mainly focuses on e-commerce transactions and doesn't let you store funds like PayPal does.
EBay needs to handle PayPal carefully. The company made a blockheaded move recently by trying to force customers in Australia to use PayPal as the only form of payment except for cash. Bullying people is not a way to increase business.
EBay would be better off making PayPal easier and more compelling to use. One way it's doing that is by encouraging software developers to make programs for use within PayPal. Merchants could use those programs to better handle repeat customers, for example.
PayPal is eBay's crown jewel and one of the Internet's biggest success stories. It's an anchor that will stabilize eBay as the company figures out its own strategy. And if eBay sells or spins off Skype, PayPal will become even more critical to the company's future.
Related reading:
EBay's changing auction strategy
EBay is looking cheap
EBay, will you sell Skype already?
Why eBay offers cheap long distance calling
Did the eBay boycott work?
EBay CEO to step down
