EBay Earnings Preview: EBAY Stock Hinges on PayPal

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Online auction giant eBay Inc (NASDAQ:EBAY) plans to split off its marketplace business from its dominant payment platform PayPal. And much of the credit can be given to activist investor Carl Icahn, who once ruffled eBay’s feathers, insisting that this split take place.

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What that means for EBAY stock is yet to be determined. My crystal ball says PayPal will thrive, while eBay will languish, making an investment in EBAY stock not such a wise decision.

Carl Icahn once described an investment in Apple Inc. (NASDAQ:AAPL) stock as a “no-brainer.” And he’s been right, if you’ve seen what AAPL stock has done since the billionaire investor made those comments in September 2013. AAPL stock is up some 97% (split adjusted).

But I don’t suspect Icahn will use the same description for EBAY stock following the PayPal split, which is scheduled to be completed in the second half of this year.

The question, though, is what does that mean for eBay and EBAY stock?

EBay and PayPal: The Most Important Subject of All

Details about which ticker PayPal will trade under is not yet known. It’s also unknown how quickly EBAY can offset the bulk of revenue PayPal contributes to its quarterly figures. And that’s a potential damaging event for EBAY stock, too.

Why? For starters, consider in 2014, PayPal generated nearly $8 billion in revenue, surging 19% year-over-year. That represents 44% of the $17.9 billion in revenue EBAY generated in 2014.

Moreover, PayPal’s net total payment volume for 2014 surged almost 30% to around $228 billion. This means PayPal handled roughly $625 million in payments every day. Granted, a bulk of that came from eBay auctions. But PayPal’s platform also allows for transactions unrelated to EBAY.

So investors, then, must reconcile, which company needs the other more? Is it eBay or PayPal?

Once that question is answered, it also becomes clear which of the two companies investors should bet on. With EBAY due to release its first-quarter earnings results Wednesday, my bet is we’ll soon learn it’s eBay that needs PayPal, not the other way around.

Why PayPal? It seems like the logical pick for Carl Icahn, given the degree to which Icahn pushed for the EBAY to split the two businesses. Not to mention the excitement Icahn displayed about Apple Pay.

What’s more, while EBAY is without a doubt still a dominant marketplace platform, it is not alone. And that’s another thing to consider before placing a bet on EBAY stock. Global competition from the likes of Amazon.com, Inc. (NASDAQ:AMZN), Alibaba Group Holding Ltd (NYSE:BABA) can accelerate the revenue decay EBAY is already experiencing. And to say nothing about the potential threats from smaller Chinese players like  JD.com Inc (ADR) (NASDAQ:JD).

Sure, PayPal will have its own competition. Apple Pay and other mobile payment options from Square, Intuit Inc. (NASDAQ:INTU) and Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) are credible threats. And that Facebook Inc (NASDAQ:FB) recently unveiled payment capabilities within its messaging app is another threat.

But this also affirms the strength of PayPal’s business. And given the lead PayPal already has with credit/debit card companies and its extensive global network, PayPal becomes a takeout candidate to Google, Facebook or Apple. And if that doesn’t happen, PayPal may go on an acquisition spree of its own, according to analyst Kerry Rice at Needham & Co. To consolidate the payments market, PayPal could buy a smaller player like Square, for instance.

“Square has done a good job of getting mind share and market share, so there might be some innovative things that could be integrated into Square,” Rice said of the possibility.

Square could not be reached for comment. And neither eBay or PayPal would talk to me, given they are in their quiet period since earnings are out Wednesday.

But where would this scenario leave eBay and EBAY stock?

EBay is certain to be questioned about these possibilities on its earnings call Wednesday. Investors of EBAY stock should not wait to find out, given that analysts have been cutting their estimates for both the just-ended quarter (lower by 8% in past three months) and the full year (lower by 8% in past three months). And for full-year 2016, earnings estimates of $3.40 per share are down 6%, from prior estimates of $3.61.

For the quarter that ended March 31, the EBAY is expected to earn 70 cents per share (flat) on revenue of $4.42 billion, up 3.7% year-over-year. For the full year ending in December, earnings are projected to be $3.10, up 5% YoY, while revenue of $18.9 billion marks a 6% increase.

With eBay’s estimates coming down, that’s not a good sign for EBAY stock.

Bottom Line

Investors would be better served waiting for eBay to issue its outlook during the conference call. And even then, the prospect for EBAY stock is not likely to improve until the company answers one key question: How will it replace PayPal’s growth?

Until that question is answered, EBAY stock may be dead money. And don’t blame Icahn.

As of this writing, Richard Saintvilus was long AAPL.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/ebay-earnings-preview-ebay-stock-paypal/.

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