Sometime in the third quarter, eBay (EBAY) will spin off PayPal, returning its payment division to a standalone company.
Originally, eBay acquired PayPal in 2002 for $1.4 billion, and after 15 years together the auction giant has succumbed to pressure from activist investors claiming the two businesses will be more valuable as separate entities.
Last month, PayPal announced its intention to resume use of its original ticker symbol PYPL on the Nasdaq exchange.
Most analysts have high hopes for PayPal stock, but the consensus for EBAY stock has been mixed. Of the 44 analysts providing recommendations to MarketWatch.com, 16 declare eBay a “buy” and 22 call it a “hold.”
Despite Struggles, eBay Continues to Grow
Share prices have consistently increased (EBAY stock is up more than 21% over the past year and more than 175% over the past five), despite eBay’s net income decrease of almost 99% from 2013 to 2014, which dropped from $2.86 billion to only $46 million — due largely to a hefty $3.2 billion tax payment in the first quarter of 2014.
But some of that decline was undoubtedly also due to the Panda 4.0 search ranking algorithm released by Google (GOOG, GOOGL) last May, which ultimately resulted in the loss of 80% of eBay’s organic traffic.
However, Larry Kim, SEO expert and founder of WordStream.com, explained that Google was not entirely to blame, and eBay’s “failure to make paid search work for them had nothing to do with AdWords and everything to do with their poorly managed campaigns.”
Regardless, EBAY stock survived the Panda 4.0 rollout and has actually risen more than 16% since then. Considering the significant decrease in net revenue over the course of a single year, there have been suspicions raised about internal accounting measures and damage being somehow hidden from the public.
EBAY Stock Faces Uphill Battle Without PayPal
Additional bearishness over the future of EBAY stock stems from the PayPal spinoff and the fact that PayPal revenue accounts for almost 44% of eBay’s total revenue. Using the $17.95 billion in gross revenue reported by eBay for 2014, this means eBay will lose approximately $8 billion in annual revenue after the PayPal spinoff.
As of March, eBay’s revenue was $18.09 billion for the trailing 12 months. Subtracting the $8 billion lost in the PayPal spinoff would leave eBay with just over $10 billion in total revenue. Management released revised guidance for FY2015 and expects revenue in the range of $18.35 billion-$18.85 billion, but that figure still includes revenue from PayPal.
If the PayPal spinoff occurs in the third quarter, management’s guidance would seem to suggest that eBay thinks it’s possible to bring in additional revenue equal to what will be lost to PayPal. Investors and analysts are left to wonder what eBay’s new CEO Devin Wenig, who will take the reigns after the PayPal spinoff, has planned to accomplish such a feat.
Earlier this year, it was reported that eBay plans to focus on the needs of high-end consumers looking for luxury items, and Wenig said the auction giant would be tailored toward consumers “with more time than money.”
Last month, eBay disclosed its intention to introduce promoted listings — a system that will give sellers more influence over ad placements in search results — and a cost-per-sales system — a new advertising platform where sellers will only be charged when buyers actually purchase items after clicking ads.
Most recently, eBay revealed an app for the Apple Watch, with hopes that jumping on the bandwagon will give revenue a boost.
Another concern for the future of EBAY stock is the $5 billion in cash that eBay will lose in the PayPal spinoff. As of the end of 2014, eBay’s total cash and equivalents was slightly more than $6.3 billion. Giving $5 billion to PayPal would leave eBay with only $1.3 billion, which amounts to a drastically reduced ability to capitalize on opportunities and fund acquisitions.
Bottom Line on EBAY Stock
Ebay has lost too much ground to competitors such as Amazon (AMZN), and countless eBay sellers are increasingly frustrated and confused by the onslaught of policy changes, fee hikes, and poor customer service they’ve been receiving over the years.
EBAY stock isn’t likely to collapse following the PayPal spinoff, but it also isn’t likely to regain any of its former luster.
As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities.