PayPal makes eBay the best play on the mobile payment sector--when the price is right

08/21/2012 12:50 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The battle over mobile point of sale payments—what software and hardware businesses will use to enable mobile phone owners to pay with their phones—is heating up. And it’s clearly going to be disruptive to some of the companies in the space such as still-private Square or eBay’s (EBAY) PayPal. But the technology also has the power to change the fortunes of the companies outside the technology sector that will use mobile payment devices and services.

The August 8 announcement that Starbucks would invest $25 million in Square and start rolling out the technology in its stores and McDonald’s (MCD) August 17 confirmation that it is testing PayPal’s mobile payments solution in 30 of its stores in France has certainly focused attention on the race. (McDonald’s had earlier run a demonstration pilot in Orlando.)

And it sure doesn’t hurt that there are big bucks involved in the mobile payment market. The Starbucks’ investment in Square was part of an investment round that valued the company at $3.25 billion. eBay’s July 17 quarterly earnings report showed 23% year over year revenue growth on a 26% increase in revenue from the company’s payments business—without a significant contribution from mobile point of sale payments. (To date PayPal has signed up more than 15 retailers, including Home Depot (HD) and Office Depot (ODP), to accept PayPal payments in their stores.)

Most attention on this race—and these two companies are by no means the only players—has focused on consumer acceptance. What payment platform would phone owners load on their phones. I think that the answer to that is likely to be determined by what businesses adopt which technology. Consumers will want the app that lets them pay at the stores they frequent everyday.

From that perspective the McDonald’s test is critical. If PayPal can shave 10 seconds off the time it takes to complete a customer transaction at McDonald’s, you’re starting to talk about real money going to the retailer’s bottom line. And McDonald’s will know—the company is obsessive about tracking how long it takes to serve a customer—and be able to quantify the gains from mobile payment technology. (The company will also be able to afford investments in optimizing the savings, if any, from that technology.)

A success at McDonald’s would be huge for PayPal but even more important for a mobile payment point of sale industry looking for traction.

You can’t invest in Square now and although there are other public companies in the space—Intuit (INTU) comes to mind—eBay is the most interesting play on this potentially huge revenue stream.

That’s because right now mobile payment point of sale technology is just frosting on a very appealing cake at eBay. The company is looking at potential double-digit annual revenue growth over the next five years, fueled by growth in the company’s payments business—PayPal—and by a turnaround in its eBay marketing business. Just as important it looks like operating margins at PayPal are climbing s the company gains efficiencies. Margins in eBay’s payment business rose to 258% in the second quarter from 21.9% in the second quarter of 2011.

The danger to eBay shares is that some other mobile payment company will announce news that convinces investors that some other company will win in this space. At this point, with the race in its early stages, that’s a risk that I’d be willing to take.

If the stock were somewhat cheaper.

I calculate a one-year target price of $52 a share for eBay. That’s a little less than a 12% gain from the $46.40 close on August 20. I’d like more upside potential than that. I’d look to buy this one on the next downturn in the market. Today I'm adding eBay to my watch list.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of eBay as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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