PayPal Stock Looks Like a Cryptocurrency Winner. It Might Be Bad News for Visa and Mastercard.

PayPal’s 361 million users can now buy, sell, and hold cryptocurrencies through the PayPal app, including Bitcoin, ethereum, and Litecoin. Crypto is coming to PayPal’s Venmo app for peer-to-peer transactions later this year, and PayPal says it plans to make crypto available as a funding source this year for purchases at its 28 million merchants worldwide.

Bitcoin prices surged above $40,000 over the last year, reaching all-time highs, though it has since fallen back to about $32,000. Since PayPal gets a cut of cryptocurrency transactions made through its app, it could fuel revenue growth above current estimates.

Palmer estimates that crypto could add more than $1 billion to PayPal’s annual revenues by 2022. He notes that PayPal is using the itBit cryptocurrency exchange, where volume has been rising. “The traction seen in itBit’s rising crypto volumes bodes well for PYPL’s active account growth and engagement,” he writes.

PayPal, in effect, could take crypto mainstream by acting as an intermediary between consumers and merchants. A consumer could buy and store Bitcoin on the PayPal app and use it to make a purchase at a store or online retailer. The merchant would get paid in dollars or another fiat currency with PayPal conducting the conversion and taking the exchange-rate risk behind the scenes.

”We see this being important for the entire crypto ecosystem,” Palmer said in an interview. “If PayPal can lead the way in promoting merchant adoption for crypto, it would be a huge driver for the space.”

One big question is what PayPal would charge merchants for crypto transactions.

PayPal now charges merchants a 2.9% fee on a standard fiat currency transaction, and most of that fee is passed along to card networks, such as Visa (V) and Mastercard (MA). But PayPal would likely charge merchants much less for crypto. Rival BitPay charges merchants a 1% processing fee, for instance, and keeps the revenue itself, cutting out the card networks (since crypto is facilitated by blockchain technology).

PayPal isn’t the only digital wallet aiming to take crypto mainstream. Square (SQ) and its Cash App may be right behind.

“We wouldn’t be surprised if Square does something similar,” says Palmer.

But PayPal may have a larger impact since it is more widely accepted worldwide and has a larger merchant base.

None of this is positive for the card networks, and it may be a factor weighing on their stocks. Indeed, shares of Visa and Mastercard have fallen about 5% to 6% this year. Square is ahead 1%, and PayPal haas risen 6% to recent prices around $248.

Palmer sees PayPal stock getting to $300 a share on a multiple of 9 times enterprise value to revenue, based on estimated 2023 sales of $39 billion. That would be a huge jump from the $25.5 billion in revenues the company is expected to take in this year. Adding an extra $1 billion a year from crypto may help it reach that target.

Write to Daren Fonda at [email protected]