AXP American Express Company

By Peter Rudegeair 

PayPal Holdings Inc. vaulted over American Express Co. in terms of market value this week, punctuating a rally that has pushed up the payments company's shares by nearly 75% since the start of 2017.

The San Jose, Calif.-based company has enjoyed breakneck growth in both e-commerce and mobile money transfers. Its market capitalization stands at about $83 billion, nearly double the $47 billion value it had when it spun off from eBay Inc. a little over two years ago.

PayPal is even gaining ground on Wall Street titans. Its market value is now around $6 billion less than Morgan Stanley's and around $10 billion less than that of Goldman Sachs Group Inc.

The strong share gains for the company run by former AmEx executive Dan Schulman have fueled investor debate about its prospects. On Wednesday, analysts at Morgan Stanley upgraded PayPal's stock, writing that it "is among the few large companies that can deliver high-teens revenue [growth] ... with significant upside opportunities."

But Craig Maurer, an analyst at Autonomous Research, said in an interview that PayPal's shares are trading so richly that shareholders aren't pricing in much room for error if the company doesn't deliver on its projections.

"When I talk to bulls, they're in the nothing-can-go-wrong camp because it's the only way to justify the valuation," Mr. Maurer said.

PayPal, which reports earnings on Thursday, now trades at a multiple of around 32 times forward earnings, according to FactSet. So although its market value is around half that of Mastercard Inc. and around two-fifths that of Visa Inc., its earnings multiple is far dearer. Visa trades at around 27 times forward earnings and Mastercard is around 29 times. AmEx, meanwhile, trades just shy of 15 times.

Under Mr. Schulman, PayPal has sought to branch out beyond its best-known offering of a checkout button that enabled shoppers to easily pay for goods and services on retailers' websites. The company has spent more than $1 billion on acquisitions of firms that provide services such as cross-border remittances, utility-bill payments and small-business lending.

Additionally, PayPal has cut deals with credit-card networks, banks, smartphone makers and other technology companies to make it easier for customers of those firms to use its namesake digital wallet. It is also pushing to expand the reach of divisions like Braintree, which enables tech companies such as Uber Technologies Inc. to accept mobile payments, and Venmo, which lets users send money digitally to one another.

"It's grown into much more of a technology platform play," said Lori Keith, a portfolio manager and research analyst at Parnassus Investments, which owns PayPal shares. "They were trying to be the disrupter in the space, but now they are very much focused on partnering."

One of the biggest pending issues on which investors and analysts are looking for clarity is what PayPal plans to do with its lending operation.

Unlike Visa and Mastercard, PayPal makes and holds on to loans to consumers and small businesses, which exposes it to the risk of default should the economic environment worsen. At the end of the second quarter, PayPal had $6.1 billion in loan balances on its books largely financed with the company's cash.

"If they have an adverse credit report, people are suddenly reminded of risk on the balance sheet," said Mr. Maurer.

PayPal executives have said they are looking at ways to continue making loans but unload the credit risk to third parties and potentially sell its outstanding loan portfolio.

Additionally, PayPal faces questions about whether the growth in its payment volume is coming at the expense of profitability. PayPal's so-called take rate, which measures the transaction revenue it earns as a share of total payment volume, slipped to 2.58% in the second quarter from 2.69% in the same period a year ago.

Then there is the threat PayPal faces from rival mobile wallets from companies including Apple Inc. and Amazon.com Inc. Each company has been looking to expand the number of online and brick-and-mortar merchants that accept Apple Pay and Amazon Pay.

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com

(END) Dow Jones Newswires

October 14, 2017 09:14 ET (13:14 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.