When picking stocks, I favor established leaders — typically larger companies that have solid balance sheets and can dominate in flourishing industries. Stick with those types of stocks, and it’s tough to go wrong.

#-ad_banner-#

Tough, but not impossible. Indeed, there’s a distinct danger to this strategy in the electronic payments space, where industry front-runner PayPal Holdings Inc. (Nasdaq: PYPL) generated lots of buzz with its July spin-off from e-commerce stalwart eBay Inc. (Nasdaq: EBAY).

Many market watchers probably see PayPal as a virtually bulletproof investment. After all, it has been number one in electronic payments for nearly two decades and currently has nearly 170 million active users in 200 countries. PayPal’s market capitalization of more than $45 billion already exceeds that of eBay by nearly $13 billion.

Plus, recent performance is promising. In the second quarter, PayPal accounted for about half of eBay’s $4.4 billion of revenue and reported large increases in key growth metrics such as the number of active customer accounts and transactions per account. Analysts foresee revenue of nearly $11 billion next year and a 17% pace of earnings growth in the coming five years.

Mobile Payments: A Breeding Ground For Competition
Trouble is, PayPal is unlikely to live up to expectations, thanks to one crucial factor that I believe is being greatly underestimated: competition.

The electronic payments industry is ripe for competition because it’s highly fragmented. In fact, PayPal already has dozens of rivals.

The fight for supremacy should be especially intense in mobile payments, which is by far the electronic payments industry’s fastest-growing area (and one where PayPal is a major force). Research firm Future Market Insights estimates that mobile payments volume will explode roughly sevenfold to $2.8 trillion globally in 2020, from just under $400 billion last year. Clearly, there is a growing consumer preference for financial transactions to be conducted from smartphones and other mobile devices.

There, PayPal likely has the most to fear from deep-pocketed behemoth Apple Inc. (Nasdaq: AAPL). Apple hasn’t fully committed yet to being the go-to mobile payments provider, analysts say, but it’s stealing market share even without a full-on effort.

Apple Pay, the company’s mobile payments application, launched in the United States last year and in the UK last month. According to technology news provider NFC World, 98% of those who’ve used Apple Pay to make payments at American stores are satisfied with the app. The satisfaction rate for in-app use — making additional purchases with Apple Pay in other company’s applications — is 93%.

Given those statistics, the Apple payment app should become increasingly popular as Apple customers upgrade to devices on which it can run (not all devices support the app). Most iPhone users in the United States will have an Apple Pay-compatible phone within a year-and-a-half, analysts project.

Another compelling statistic favoring Apple: In a survey of primarily North American consumers earlier this year, IT research firm 451 Research found that 45% of respondents intended to use Apple Pay in the near future, while only 28% planned to use PayPal.

Google And Others Are Making Strides
Besides Apple, PayPal can expect stiff competition from Google Inc. (Nasdaq: GOOG), which introduced its mobile payments app, Google Wallet, several years ago. This app was a distant third in the 451 Research survey mentioned above, with only 13% of respondents saying they planned to use Google Wallet in the near future.

That still makes Google a top name in mobile payments, and the app is still capable of gaining ground. For instance, it has received positive reviews for ease of use, data security and the ability to store club and gift cards.

PayPal has another potential rival in Dwolla Inc., a 2010 startup, which offers real-time payments as though money is “handed off in person, without the standard three- or four-day processing delay of the Automated Clearing House,” Fortune writer Daniel Roberts recently pointed out. In April, Dwolla formed its first major partnership, an agreement to provide services through BBVA Compass Bancshares, one of the 25 largest U.S. commercial banks by deposit market share.

In July, credit card giant Visa Inc. (NYSE: V) announced that it was investing in Stripe Inc., another recent digital payments startup known for simplicity, broad compatibility and strong customer service. Stripe boasts other high-profile investors, too, including American Express Company (NYSE: AXP) and venture capital firm Sequoia Capital. Stripe also has agreements to handle payments for American Express and Alipay, which is China’s largest digital payments processor.

Other PayPal competitors include Payoneer, 2Checkout, WePay and Square. Some of these have a leg up on PayPal in user friendliness and customer service. As a group, they’re likely to chip away at PayPal’s market leadership through sheer numbers, as well.

Risks To Consider: PayPal has been criticized for less-than-stellar customer service and account freeze-ups, factors that could contribute to lost market share if not corrected. As an upside risk, PayPal’s spin-off agreement permits partnerships with eBay competitors that it wasn’t allowed to work with before, such as Amazon.com (Nasdaq: AMZN) and Alibaba Group Holding Limited (NYSE: BABA). No deals have yet been announced with either e-commerce giant, though.

Action To Take –> PayPal may be the most recognizable name in electronic payments, but it’s by no means a no-brainer investment. I see it progressively losing ground to a wave of emerging  competitors, particularly Apple and possibly the two hot startups described above. PayPal’s stock has risen a few points since the spin-off, despite recent market tumult. But analysts are likely being overly optimistic with their profit projections, so long-term returns are apt to disappoint.

Editor’s Note: Facebook’s Mark Zuckerberg calls it “the greatest revolution yet.” And one little-known company owns a near-monopoly on the key technology making it possible… To see our latest research report on this shocking $2.2 trillion breakthrough — and how you can profit — visit this link.