PayPal Doesn't Deserve A Multiple Higher Than Visa, Mastercard

Wells Fargo announced this week that starting August 1, it would offer real-time, mobile P2P services to its mobile banking users, joining Bank of America, JPMorgan and US Bank in working with the clearXchange network. The renewed P2P push by large banks is “a likely indication that overall client acquisition costs will increase, CLSA’s Tom McCrohan said in a report.

Marketing Costs To Increase

Paypal Holdings Inc (NASDAQ: PYPL) does not disclose a customer acquisition cost. Analyst Tom McCrohan noted, however, that the company’s selling and marketing levels had increased in 2014 and are now more in-line with networks Visa Inc (NYSE: V) and Mastercard Inc (NYSE: MA).

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“We believe these costs are heading even higher,” McCrohan wrote. Sales and marketing costs represent 8.5 percent of PayPal’s total revenue, versus 5-7 percent for Visa.

Since Visa and MasterCard do not fund reward programs, a comparison with American Express Company (NYSE: AXP) may be more appropriate, since it spends 22 percent of net revenue on member rewards. “While we don't envision PayPal offering Amex-like rewards, we do view PayPal's recent single-digit growth rates in product development and marketing as unsustainable,” the analyst commented.

PayPal would likely increase spending on marketing and incentives in an attempt to drive consumer engagement. Given the intensifying competitive landscape, driving profitable customer engagement continues to be a challenge.

“We do not believe PayPal is worthy of a multiple above Visa and MasterCard, especially considering PayPal's credit risk, continued take-rate compression, deceleration in international revenue growth (decelerated 500bps in IQ YoY), and what we deem to be a weakening competitive moat,” McCrohan stated. He has an Underperform rating on PayPal, with a price target of $38.