Wedbush Securities sees eBay Inc. (NASDAQ: EBAY) as the best investment in the growth of mobile payments.
We believe PayPal will capitalize on its superior position in mobile payments extending its 25 percent to 30 percent growth, turning into eBay's largest business by 2014 and leading to significant multiple expansion, said Gil Luria, an analyst at Wedbush Securities.
He believes that some of these benefits will occur with the short-term Phase 1 bridge technologies and will increase significantly as PayPal is integrated into the Point of Sale (POS) through mobile devices (Phase 2). This means PayPal's move offline is not predicated on mobile payments but will be significantly enhanced by this shift.
Google Inc.'s commercial introduction of its app, Wallet, last week makes mobile payments a reality and brings PayPal upside closer. Additionally, Luria believes the catalyzing effect on mobile payment adoption by the likes of Google and Isis will create a market that many participants will gain from, not the least of which is PayPal.
We have been using the live version of Google Wallet for a week and have been overwhelmingly impressed by the abundance of compatible POS, speed, ease-of-use and available functionality (card selection, card default and loyalty card single tap), said Luria.
Based on his analysis of key success factors in the battle to own the mobile wallet, Luria believes PayPal is best positioned within the group of early entrants.
Although there are very few live products that reflect the promise of mobile payments, Luria believes PayPal's technology-agnostic approach will not only help it diversify its bets but will also allow it a head start, in comparison to technologies that are available today.
Luria believes PayPal will move offline with large merchants that have existing relationships, which means it does not need to hire an acquiring sales-force and does not need to route through Visa/MasterCard at the POS.
Further, its superior funding mix should allow PayPal to price its acquiring competitively, especially if Visa proceeds with plans for treating some mobile payments as card present.
Additionally, PayPal should be able to justify the $2 billion increase in total payment volume (TPV) expected within its first full year of moving offline, based on a couple of similar ramps that are happening this year.
Within the first nine weeks of introducing its mobile payment app, for example, Starbucks has reported 3 million transactions, implying far greater than a $70 million TPV annualized run rate, in spite of the very early stages of consumer adoption and awkward bar code scanners.
PayPal itself has indicated it expects $3 billion of mobile commerce TPV this year, up from $750 last year, indicating the speed at which consumers are adapting to the new technology.
We believe that the shift offline will keep PayPal growing at 25 percent to 30 percent rates, helping it increase scale in a business with high operating leverage and margins which appear uncapped anywhere below 50 percent. We believe this will help mitigate the overall impact of mix shift from Marketplace to PayPal, said Luria.
The brokerage reiterated its outperform rating on shares of eBay with a price target of $48. The brokerage maintained its 2011 EPS estimate of $2.04 on revenue of $11.54 billion and its 2012 estimate of $2.40 on revenue of $13.70 billion.
eBay stock closed Friday's regular trading down 3.85 percent at $29.49 on the NASDAQ Stock Market.