Ebay (EBAY) stock shot higher this week on the news of the auction website’s decision to go through with a PayPal spinoff.
Activist investor Carl Icahn argued vehemently for the PayPal spinoff earlier this year, but to deaf ears. Still, when an idea makes sense, it makes sense, and eBay finally capitulated — good for Icahn, who made a cool $138 million thanks to Wall Street’s reaction to eBay’s decision.
From a longer-term perspective, what should eBay shareholders think of this deal? And what will an independent PayPal look like?
I tend to agree with InvestorPlace’s own Dan Burrows, who recommended selling eBay stock after the PayPal spinoff goes through.
But what’s to be done with PayPal?
PayPal: A Payment-Processing Powerhouse
A standalone PayPal entity will allow investors to buy into eBay’s growth engine without having to worry about the slower-growing, less-exciting part of eBay’s business.
Dan Schulman — freshly plucked from his position as president of the Enterprise Growth group at American Express (AXP), will serve as the first PayPal CEO when the spinoff is completed in 2015. Schulman has a stellar history as a senior executive, having served as a bigwig at AT&T (T), Priceline (PCLN) and Virgin Mobile.
Enough about management. The real reason PayPal post-eBay is destined for success is found in the numbers. According to eBay:
“PayPal is … the most trusted digital wallet, with more than 152 million active registered accounts. Accounts grew 15% year-over-year last quarter. Revenue over the last 12 months grew by 19% over the prior year period to approximately $7.2 billion.”
To get a sense of how capable PayPal is all by itself, consider this: Over the past 12 months, PayPal accounted for about 42% of eBay’s total revenue — up from 2012, when PayPal revenues accounted for a bit under 40% of eBay sales.
With PayPal becoming decreasingly dependent on eBay and the waning growth of eBay Marketplace for payment volume and customer acquisition, Bernstein Research estimates that four years from now, eBay Marketplaces will account for just 17% of PayPal’s total payment volume. Today that number is 29%.
Put more succinctly, PayPal doesn’t need eBay anymore.
Clearly a PayPal spinoff wouldn’t happen if the company weren’t able to go it alone, but that’s not to say PayPal won’t have its share of competition to contend with. Carlos Kirjner of Bernstein Research addressed that topic today in a report on the proposed spinoff, saying:
“A large number of large, resourceful players are potential and actual competitors of PayPal, including Apple (AAPL), Google (GOOG), Facebook (FB), Amazon (AMZN), Visa (V), Mastercard (MA), Amex, Microsoft (MSFT), Nokia (NOK), credit and debit card issuing banks, merchant acquirers, and mobile carriers worldwide.”
The payment processing industry is absolutely teeming with competitors.
But unless PayPal has stopped growing and diversifying by the time it goes public next year, don’t let a little competition scare you away from the stock. PayPal facilitates an absolutely staggering amount of online transactions; eBay’s press release announcing the spinoff claims that one in every six dollars spent online is processed through PayPal. It has been around since 1999. It’s not going anywhere.
It’s worth noting that while you shouldn’t bank on it, there’s a remote possibility that some of the companies mentioned above might actually be interested in acquiring the payment processor upon the completion of the PayPal spinoff. First to mind is Alibaba, which is flush with cash after its record-setting $25 billion IPO.
Although the idea that PayPal could be a buyout target from day one of its IPO is enticing, that would just be the cherry on top.
Even if PayPal doesn’t get snapped up, it should be an enticing investment.
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As of this writing, John Divine was long AAPL, GOOG and GOOGL.
