Ebay Inc (NASDAQ:EBAY), the online auction website, will spin off its wildly successful PayPal payments division sometime in the second half of this year. Ever since the deal was first announced last September, investors have been trying to figure out just how much a standalone PayPal (and standalone eBay) would be worth.
According to a report today from Bernstein Research analysts Carlos Kirjner, Andrea Rosso and Ben Betcher, PayPal is worth $39 per share of EBAY stock, or 68% of eBay’s closing price on Thursday.
How is that possible? Should eBay investors keep their PayPal stock and shed the new eBay shares when the spinoff goes through? Should they keep both? Ditch both?
Let’s take a look.
Great Bullish Momentum for PayPal
The Bernstein report cited a number of overwhelmingly positive factors playing in PayPal’s hands. Perhaps most surprising is Bernstein’s view that PayPal’s competition just isn’t that much of a problem. At all.
Apple Inc. (NASDAQ:AAPL)? No problem, apparently. Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL)? Please.
If you’re worried that Apple Pay could be a PayPal killer, you can rest easy, says Bernstein:
“In the end, the impact of Apple Pay is capped by the fact that Web-payments are not about to disappear and the scope of Apple Pay’s future presence in the Web is likely severely limited (if it becomes significant at all), and by the fact that iOS users correspond to only 15% of global smart phone users, a relatively small number even if these users account for a disproportionate amount of online spend.”
A common fear is that mobile apps and payment systems such as Apple Pay and Google Wallet will eat away at PayPal’s profitability, but Bernstein sees it differently.
“Importantly, mobile apps and mobile payments … expand the total volume of online payments and hence benefit PayPal. In fact, we believe that the convenience of mobile has contributed and will continue to contribute to the growth of “traditional” (i.e., well established) online transactions. It is also enabling the extension of the Internet to new markets (e.g., Uber, Instacart, Zirx).”
With a sustainable competitive advantage in its large, well-established network, an active user count that’s doubled in just five years, and a generally wealthier demographic with a high penetration of the 25- to 45-year-old market, PayPal will be just fine.
Bottom Line
If forced to choose, I’d much rather own PayPal stock than the new-look eBay stock. But that doesn’t mean EBAY stock will be entirely useless post-split.
The two companies announced a deal yesterday in which eBay and PayPal each agreed not to develop services that compete with the other for a period of five years. And eBay will continue to be highly integrated with PayPal; eBay agreed to flow 80% of gross merchandise sales through PayPal over the next five years.
It’s a win-win for eBay and PayPal, as each company will be seeking to define themselves as standalone companies.
That said, PayPal has the biggest upside of the two by a longshot, as it’s free to market its services to the likes of other e-commerce giants like Amazon.com, Inc. (NASDAQ:AMZN) and Alibaba Group Holding Ltd (NYSE:BABA) for growth.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
