eBay Inc (NASDAQ:EBAY) was once a game changer.  When the internet was very young, and few businesses provided e-commerce, eBay was a pioneer.  From humble beginnings selling Pez dispensers, eBay grew into a powerhouse.  Things we used to sell via garage sale we could now list on eBay.  Small businesses could create stores on eBay to sell goods to customers they otherwise would never reach.  And collectors as well as designers suddenly discovered all kinds of products they formerly could not find.  eBay sales exploded, as traditional retail started it slide downward.

To augment growth eBay realized those selling needed a simple way to collect money from people who lacked a credit card.  Many customers simply had no card, or didn’t trust giving out the information across the web.  So eBay bought fledgling Paypal Holdings Inc (NASDAQ:PYPL) for $1.5B in 2002, in order to grease the wheels for faster e-commerce growth.  And it worked marvelously.

But times have surely changed.  Now eBay and Paypal have roughly the same revenue.  About $8B/year each.  eBay has run into stiff competition, as CraigsList has grown to take over the “garage sale” and small local business e-commerce.  Simultaneously, powerhouse Amazon has developed its storefront business to a level of sophistication, and ease of use, that makes it viable for businesses from smallest to largest to sell products on-line.  And far more companies have learned they can go it alone with internet sales, using search engine optimization (SEO) techniques as well as social media to drive traffic directly to their stores, bypassing storefronts entirely.

eBay was a game changer, but now is stuck in practices that have become far less relevant.  The result has been 2 consecutive quarters of declining revenue.  By definition that puts eBay in a growth stall, and fewer than 7% of companies ever recover from a growth stall to consistently increase revenue by a mere 2%/year.  Why not?  Because once in a growth stall the company has already missed the market shift, and competition is taking customers quickly in new directions.  The old leader, like Paypal, keeps setting aggressive targets for its business, and tells everyone it will find new customers in remote geographies or vertical markets.  But it almost never happens – because the market shift is making their offering obsolete.

On the other hand, Paypal has blossomed into a game changer in its own right.  Not only does it support cash and credit card transactions for the growing legions of on-line shoppers, but it is providing full payment systems for providers like Uber and AirBnB.  It’s tools support enterprise transactions in all currencies, including emerging bitcoin, and even provides international financial transactions as well as working capital for businesses.

Paypal is increasingly becoming a threat to traditional banks.  Today most folks use a bank for depositing a pay check, and making payments.  There are loans, but frequently that is shopped around irrespective of where you bank.  Much like your credit cards, which most people acquire for their benefits rather than a relationship with the issuing bank.  If customers increasingly make payments via Paypal, and borrow money via operations like Quicken Loans (a division of Intuit,) why do you need a bank?  Discover Services, which now does offer cash deposits and loans on top of credit card services, has found that it can grow substantially by displacing traditional banks.

Paypal is today at the forefront of digital payments processing.  It is a fast growing market, which will displace many traditional banks.  And emerging competitors like Apple Pay and Google Wallet will surely change the market further – while aiding its growth.  How it will shake out is unclear.  But it is clear that Paypal is growing its revenue at 60% or greater since 2012, and at over 100%/quarter the last 2 quarters.

Paypal is now valued at about $47B.  That is roughly the same as the #5 bank in America (according to assets) Bank of New York Mellon, and number 8 massive credit card issuer Capital One, as well as #9 PNC Bank – and over 50% higher valuation than #10 State Street.  It is also about 50% higher than Intuit and Discover.  Based on its current market leadership and position as likely game changer for the banking sector, Paypal is selling for about 8 times revenue.  If its revenue continues to grow at 100%/quarter, however, revenues will reach over $38B in a year making the Price/Revenue multiple of today only 1.25.

Meanwhile, eBay is valued at about $34B.  Given that all which is left in eBay is an outdated on-line ecommerce conglomerator, stuck in a growth stall, that valuation is far harder to justify.  It is selling at about 4.25x revenue.  But if revenues continue declining, as they have for 2 consecutive quarters, this multiple will expand.  And values will be harder and harder to justify as investors rely on hope of a turnaround.

eBay was a game changer.  But leadership became complacent, and now it is very likely overvalued.  Just as Yahoo became when its value relied on its holdings of Alibaba rather as its organic business shrank.  Meanwhile Paypal is the leader in a rapidly growing market that is likely to change the face of not just how we pay, but how we do personal and business finance.  There is no doubt which is more valuable today, and likely to be in the future.

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