: PayPal closes in on Mastercard’s valuation amid boom in online shopping

United States

PayPal Holdings Inc. is edging in on Mastercard Inc.’s valuation in a sign of how the pandemic has fostered greater appreciation for the PayPal business model, with more people turning to e-commerce.

PayPal PYPL, +0.65% looked on track to finish Thursday’s session with a market capitalization above Mastercard’s MA, +2.59% as the digital payments company held its investor day, but PayPal shares pulled back late in the session after the company delivered a five-year financial forecast viewed as potentially conservative. Still, PayPal is knocking on Mastercard’s door, ending Thursday with a market cap of $ 331.7 billion, compared with $ 332.5 billion for Mastercard.

PayPal shares are up 2.3% in premarket trading Friday, while Mastercard shares are up 0.2%.

A possible pull ahead for PayPal illustrates how the pandemic has played out in the payments universe over the past year, with PayPal experiencing booming growth as more people embrace online payments and increase the frequency at which they shop online. Mastercard also has benefited from increased e-commerce adoption, but its business has felt pressure from the travel slowdown, as travel typically drives lucrative cross-border revenue for the company when consumers pay with their cards in countries other than where those cards were issued.

PayPal and Mastercard are currently the 16th and 17th largest U.S. companies by market value and MoffettNathanson analyst Lisa Ellis noted that of the 20 largest U.S. companies, only Tesla Inc. TSLA, +0.85% has enjoyed a bigger stock surge than PayPal over the past year. PayPal is up 140% and the fifth-best performer overall in the S&P 500 SPX, +0.17% over that span.

Ellis mused on PayPal’s potential to eclipse Mastercard in market cap in a Friday morning note to clients, asking simply in the report’s title: “Is PayPal Worth More than Mastercard?” She concluded that PayPal is “probably not” worthy of a larger valuation than Mastercard in the near term, given that “people will travel again,” which could give a lift to Mastercard’s stock. Shares of Mastercard look undervalued in her view, as she expects the company to generate 35% to 40% more free-cash flow than PayPal over the next two years.

In the long term, though, PayPal could come to be worth more, she argued. PayPal laid out five-year targets that equate to 20% compound annual revenue growth and 22% compound annual earnings-per-share growth at its investor day Thursday, while Ellis expects 12% to 14% annual revenue growth and 16% to 18% annual earnings growth for Mastercard in a “steady state” after the pandemic.

PayPal recorded 2020 revenue of $ 21.5 billion and net income of $ 4.2 billion, or $ 3.54 a share, while Mastercard reported 2020 revenue of $ 15.3 billion and net income of $ 6.4 billion, or $ 6.37 a share.

PayPal’s narrative hinges on further growth of its online checkout business as well as an expansion of the company’s non-payments offerings, a strategy the company discussed in depth during its investor day presentations. PayPal sees a big opportunity to make its app a one-stop hub for all things financial services by bundling in features like cryptocurrency trading, which the company already allows, as well as eventual capabilities like savings accounts and investing tools.

“We believe that PayPal will be successful in expanding the usage of its wallet ‘beyond the checkout button’ to include a wider array of ‘super app’ services,” Ellis wrote in her note to clients. Adoption of these services could help “materially expand” PayPal’s average revenue per user, she reasoned, something she called “the most likely source of upside to PayPal’s new five-year outlook.”