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Stock Strategist

Checking Out PayPal

It has a head start in an increasingly competitive electronic payment market.

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 PayPal (PYPL) is a company at a crossroads as it splits from eBay (EBAY). The payment industry is rapidly evolving, creating endless opportunities for the firm to capitalize on its growing network but encouraging the proliferation of new competitors. The company has a big head start over its wallet competitors in terms of trust and online acceptance, which should allow it to benefit from the rapid growth of digital payments over the near term.

PayPal lacks control over key software and hardware functions in the smartphone space, a position we see as a double-edge sword. This creates the potential for PayPal to be eventually squeezed out of the physical and mobile point of sale by larger players including Apple (AAPL) and Google (GOOG). An initial foray into the physical realm with Home Depot and Discover fizzled immediately, and the aforementioned competitors--along with newcomers like Stripe--are beginning to make inroads into PayPal's home turf online.

Jim Sinegal has a position in the following securities mentioned above: GOOG. Find out about Morningstar’s editorial policies.