It has been 14 months since former stablemates PayPal Holdings Inc (NASDAQ:PYPL) and eBay Inc (NASDAQ:EBAY) became two separately traded companies.
Brought about by the incessant nattering of activist investor Carl Icahn, who believed PayPal’s true value wasn’t reflected in the price of eBay stock, it has been the slower-growth company (eBay) whose stock has performed better — up 18.2% between July 20, 2015, and Sept. 16, 2016, compared to -1.8% for PayPal.
To date, Carl Icahn’s been proven wrong about his assessment of the situation. Quite rightly that’s got investors wondering which is the better stock.
Why PayPal Stock?
PayPal’s revenues in the second quarter grew 19% year-over-year excluding currency. eBay’s, by comparison, grew 6% excluding currency. In terms of earnings, PayPal’s earnings on a non-GAAP pro forma basis grew 10% year-over-year while eBay’s declined by 4% year-over-year on a non-GAAP pro forma basis.
In terms of the top and bottom line, PayPal is definitely growing faster although as InvestorPlace contributor Hilary Kramer put it recently, “PYPL stock isn’t a hyper-growth story, but it’s easily making double what other payment companies are posting and it is still growing faster than the majority of the stocks in the financial sector. By industry standards, PayPal stock is still a unicorn.”
In Q2 2016, it processed 1.4 billion transactions, 25% more than in Q2 2015 on $86 billion in total payment volume (TPV). While its overall TPV increased 29% year-over-year, it was its Venmo social payments platform that saw the biggest growth in the quarter, up 141% with the processing of $3.9 billion.
The reality is PayPal stock remains attractive to investors because of its position and market share within the online payments industry. As such, investors will continue to value PayPal stock.
Why eBay Stock?
The company’s Q2 2016 earnings and revenues beat analyst estimates — $2.23 billion in revenue, $60 million higher than expected with earnings per share of 43 cents, one penny higher than expected — prompting the company to raise its outlook for the remainder of the year.
It now expects annual revenues of at least $8.85 billion, up from $8.6 billion, on adjusted profits from continuing operations of at least $1.85, up from its previous forecast of at least $1.82.
For me what’s exciting about eBay is that it has a plan to forge ahead without getting in the direct crosshairs of Amazon.com, Inc. (NASDAQ:AMZN). At the same time, it’s generating more free cash flow than PayPal from lower annual revenues.
It’s profitable and growing. Maybe not at double-digit levels but as long as it maintains quarterly growth of 5% to 6%, the profits will continue to roll in.
Valuation
In the trailing 12 months, according to Morningstar, eBay’s free cash flow was $2.45 billion. With a market cap of $36 billion, its FCF yield is 6.8%.
PayPal’s trailing 12-month free cash flow is $2.18 billion. With a market cap of $48.5 billion, its FCF yield is 4.5%, 230 basis points less than eBay. When using enterprise value instead, eBay’s margin of victory narrows to 160 basis points.
If you’re a value investor, EBAY is definitely the better buy.
Bottom Line
PayPal stock is attractive for the simple reason that partners such as Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) will eventually look to acquire the online payments leader.
Much like the inevitable purchase of Monster Beverage Corporation (NASDAQ:MNST) by The Coca-Cola Co (NYSE:KO) keeps a floor beneath MNST stock, I see the same thing happening with PayPal stock.
That’s got to be attractive to investors.
On the other hand, you can’t help but like eBay’s steady-as-she-goes trading sentiment. Unless things go terribly wrong at the e-commerce company, long-term gains are in the cards.
But if I can only pick one I’d have to go with PayPal. It benefits regardless of who wins the e-commerce wars.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
