PayPal Holdings, Inc. (NASDAQ/PYPL): The New Tech Giant with a $50.0 Billion Valuation

PayPal HoldingsThe tech industry has a new giant on board. But it is not that new as it has been around since 1998. I’m talking about PayPal Holdings, Inc. (NASDAQ/PYPL). After being spun off from eBay Inc. (NASDAQ/EBAY), the company instantly became the sixth-largest tech company in the U.S., with a market cap of close to $50.0 billion.

While previously under eBay, PayPal was growing much faster than eBay’s Marketplace business. In 2014, PayPal’s revenue increased 19% to $7.9 billion, with operating income rising 16% to $1.8 billion. PayPal processed $235 billion in total payment volume last year, with mobile payment volume surging to $46.0 billion.

IPO Bought by eBay, IPO Again

The company was originally founded in 1998 under the name Confinity, and was developing security software for handheld devices. In 1999, the company started offering money-transfer service.

PayPal went public in 2002. In the same year, it was bought by eBay for $1.5 billion. It made sense at the time; eBay was the dominant online auction platform while PayPal was the dominant digital payment service provider.

PayPal enjoyed tremendous growth in its 12 years under eBay’s ownership. The company now has 169 million active customer accounts, serving people in 203 markets, and allowing customers to get paid in more than one hundred currencies.

In 2013, hedge fund manager and activist investor Carl Icahn suggested that eBay should spin off its PayPal business. He argued that PayPal was eBay’s best performing asset and could grow even faster on its own.

On September 30, 2014, eBay announced that it would spin off PayPal into a separate publicly traded company. Investors cheered on the news and eBay’s stock price surged 7.5% on the announcement day.

On July 20, 2015, PayPal started trading as a separate and publicly traded company for the second time. Its share price jumped up 5.4% and closed at $40.47. eBay’s share price also edged up, gaining 2.4% on Monday.

First Mover Advantage Still Faces Stiff Competition

PayPal has a solid first mover advantage in the digital payment industry. Newer entrants are going to have a hard time competing with the incumbent, who has a huge network of customers and businesses.

But existing companies in both the financial sector and the technology sector might want to have a piece of the pie. Credit card companies such as Visa Inc. (NYSE/V) and MasterCard Incorporated (NYSE/MA) both have huge presence in the online payment industry. Apple Inc. (NASDAQ/AAPL) is in the game now too with its Apple Pay. Internet giant Google Inc. (NASDAQ/GOOG, GOOGL) is also taking a shot at the business with its Google Wallet. Competition is getting fierce to say the least.

The interesting fact is, after being spun off, PayPal became a bigger company than the former parent eBay. PayPal’s valuation right now stands at close to $50.0 billion, while eBay is quite smaller at $33.7 billion. Moreover, PayPal is also bigger than Netflix Inc. (NASDAQ/NFLX) and Twitter Inc. (NYSE/TWTR). The only tech giants that are greater than PayPal are Apple, Google, Microsoft Corporation (NASDAQ/MSFT), Facebook Inc. (NASDAQ/FB), and Inc. (NASDAQ/AMZN) (Source: Statista, July 20, 2015.)

More Acquisitions to Come

In the face of increasing competition, PayPal has adopted an aggressive acquisition strategy.

The company’s acquisition tactic started a decade ago when it bought the VeriSign payment solution in 2005 in order to expand its presence in the ecommerce sector and to provide added security measures. Then, in 2008, PayPal acquired Fraud Sciences for $169 million to improve its fraud management systems. In the same year, PayPal acquired Bill Me Later, which later became PayPal Credit, and offered consumers revolving credit online without using a credit card.

In 2013, it acquired engagement software firm IronPearl, and payment gateway company Braintree. Most recently, the company announced that it would acquire Xoom Corporation (NASDAQ/XOOM). The deal would be all cash and PayPal would pay $25.00 per share of Xoom, valuing the acquiree at $890 million.