E-commerce player eBay Inc (EBAY) split off its PayPal Holdings inc (PYPL) division last July, turning each into a separately traded company. In essence, both firms returned to their status back in 2002, when eBay acquired PayPal for $1.5 billion.
Ebay certainly helped PayPal take flight from its founding back in 1998, with PYPL eventually reporting $8 billion in revenue and processing $235 billion in payment volumes in 2014 in its final full year before the split.
But given the divergence in the growth trends in each business over the past several years, there was a valid argument to be made to again separate eBay stock from PayPal stock.
Billionaire activist investor Carl Icahn pushed fiercely for a split, in fact, and voted with his money to swap his stake in EBAY for PYPL shortly after the July split occurred.
Now that quite a few months have passed since the split, investors have a pretty clear window to look through in gauging both eBay stock and PayPal stock. And investors shouldn’t blindly assume that Icahn’s support for PYPL precludes EBAY as a worthy investment candidate.
PayPal’s Impressive Growth Potential
PayPal is certainly the sexier choice in terms of growth and overall upside potential. According to analyst projections, PayPal will grow revenue 15% for at least the next two years and report in excess of $12 billion in sales for all of 2017. Earnings growth is expected to be even stronger, rising in the high-teen rate over this period and reach $1.76 per share.
Just prior to the split, Icahn also touted the takeover appeal in PayPal and suggested that the larger credit card providers, including Visa Inc (V) and MasterCard Inc (MA) or even Alphabet Inc (GOOG) could try to snap up PayPal and look to dominate the flourishing online payment market for years to come.
The secular growth of online payments and shift to digital financial transactions is certainly compelling, but it also means the space is going to be hotly contested. PayPal is doing great, but it is difficult to say for certain it will be able to keep its lead and grow profits steadily over the next decade.
And while the forward P/E (2017 estimates) on PayPal stock isn’t crazy at nearly 21, it does leave downside risk should growth trends not be as rosy as predicted.
Don’t Underestimate eBay
On the flip side, investors don’t expect a whole lot out of eBay stock these days, as evidenced by its P/E of under 12. Meanwhile, projected revenue growth over the next couple of years is downright anemic in the low single digits. Analysts expect total sales of about $9 billion for all of 2017.
EBAY’s 2015 results were equally uninspiring in terms of growth. Sales fell by a couple of percent, as did earnings.
However, free cash flow was roughly $3.4 billion ($2.80 per share of EBAY stock), and $550 million of it went to buying back its own stock and reducing shares outstanding. Cash and short-term investments sit at about $6.1 billion, which helps to mostly offset $6.8 billion in long-term debt.
The bottom line on eBay stock is that market expectations are low, and it certainly no longer qualifies as a fast-growth tech name. However, its prospects are very compelling compared to more traditional brick-and-mortar retailers that continue to struggle from the likes of eBay and Amazon.com, Inc. (AMZN) as consumers increasingly migrate online to buy goods.
And as a little bit of a kicker, eBay also owns StubHub, an online reseller of concert and sporting event tickets.
PayPal Stock vs. eBay Stock
Technology investors, including those interested in large-cap tech names of the burgeoning financial technology (fintech), will certainly gravitate to PayPal stock. Its lead in online payments and the fact much of the world is still shifting from paper money to digital transactions (both credit card and online) represent compelling headwinds to the industry’s continued growth. PayPal’s takeover potential is also a great potential catalyst.
The rapid-growth days of eBay stock are likely behind it, but it still compares favorably to traditional retailers. Its very reasonable valuation also leaves upside should growth come in ahead of expectations.
So if you’re weighing whether to buy PYPL over EBAY, yes, PayPal certainly has more growth prospects. But eBay stock is far from a clunker.
As of this writing, Ryan Fuhrmann was long shares of EBAY and PYPL, but did not hold a position in any of the other aforementioned securities.
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