EBAY & PYPL: The Divorce is Final

sagawa

After a strong 2Q15, PYPL heads to its Monday spin with significant business momentum. Given the near term trajectory of e-commerce, and competitive moat of its small business focus, 2015 estimates look easily achievable and 2016’s are plausible, likely a recipe for appreciation. Still, the share price implies long term growth that may be difficult to achieve, as the nature of on-line payments changes and structurally advantaged rivals erode PYPL’s early mover gains over time. Meanwhile, forward-going EBAY has the benefit of lowered expectations – near term consensus expectations are modest, particularly with likely relief from FX headwinds in 2016, and the -4.5% declining cash flow CAGR implied by the “when issued” share price is, we believe, unrealistically pessimistic. We also see potential for a post-spinoff acquisition of EBAY, with BABA and GOOG having clear potential synergies. While it has been rumored, we don’t see an obvious TMT buyer for PYPL.

This note is solely the perspective of the SSR TMT team and does not represent the views of our Finance analyst.

  • Strong 2Q15 PYPL #’s show business momentum. PYPL’s 17% ex-FX sales growth is the product of strong underlying e-commerce growth and international expansion, with a competitive moat provided by historically sticky small merchant customers. We see expectations for 15% growth in CY15 and 16% for CY16 as achievable. In this context, PYPL investors would likely see attractive near term returns.
  • Significant risks to PYPL implied long term growth. The PYPL “when issued” price implies a 10-yr FCF growth CAGR of more than 11%. This will be difficult to achieve beyond the next 2-3 years. The consumer shift to mobile platforms will greatly favor payments utilities being integrated into the iOS and Android platforms and offering convenience, cost and functional advantages vs. 3rd party solutions like PYPL for m-commerce, in-app AND in-browser transactions.
  • EBAY expectations modest. Subtracting PYPL suggests expectations for less than 5% sales growth in 2016. Given a more neutral FX environment, more focused management and a still strong e-commerce environment, we believe upside more likely than downside. The “when issued” price for EBAY implies 10-yr annual cash flow decline of more than 4%. We believe that this is far too pessimistic.
  • EBAY may be more likely to be acquired. EBAY’s marketplace business, with its modest valuation, could make an interesting target for companies, like BABA or GOOG, looking to expand their presence in consumer e-commerce. Meanwhile, we do not believe that PYPL fits with any of the TMT names – GOOG, FB, AMZN, AAPL, BABA, etc. – that have been rumored as possible buyers.
  • PYPL may move out of the blocks faster post spin. We expect growth investors to drive trading in both names Monday, potentially boosting PYPL relative to EBAY. This advantage may be temporary, as EBAY will have strong appeal to value investors. Between the two, we see the opportunity in EBAY as more compelling, particularly given the potential of M&A.

Please see our published research page for the full note.

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