The same can be told about social media companies. But we have only a handful of players like Facebook, Instagram, Twitter, etc. Why? These are platforms that require a critical mass of users. This is true for online payment companies.
How difficult is it to get these critical mass of users for an online payment app? We can find out if we go to a grocery store nearby. Even six years after the demonetization (2016) and a pandemic (2020-21), and a very successful democratizing technology like UPI, we’re likely to find only 3 main ways to do online payment to your grocer (paytm, phonepe, gpay). In spite of huge war chest, WhatsApp couldn’t succeed, Amazon Pay couldn’t break through yet in this space. The moat is not exclusive, but clearly the entry barrier is very high.
No matter how bizarre the comparison looks now, this is very much comparable if we consider this:
- One company has to have an army of sales people making cold calls who are under constant severe pressure to increase the sales numbers (Check social media about people getting frustrated with spam calls from Bajaj Finance).
- The other company has zero sales people making zero calls, yet able to disburse incredible number of loans. Yes, the size of the loans is small, but clearly the writing is on the wall about what is the best way to increase sales. Did you get any sales call from paytm pestering about personal loans ever?
I believe this is the only valid skepticism, as Paytm is indeed losing truck load of money. Is this skepticism priced in the current valuations? Maybe. We also should not forget that PayPal, Facebook, or Amazon were loss making. So it is not unreasonable for people to believe that paytm could also become profitable, considering that they’re not taking in lots of debt.
Another way to look at is this: Are online payment players important for our economy? Yes. One can even think that it will be a disaster for our economy if none of them become profitable. So if any of these players can become profitable, paytm has a better of the chances to be that one. How much is this belief worth is what drives paytm’s current valuations.
Clearly, the early investors like Softbank don’t have this belief, as they’re selling off after lock-in period (or under pressure from their investors).
Paytm’s valuation should consider these aspects.
Disclosure: Invested for learning purposes.
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