Stifel Equity Trading Desk analysts Jordan E. Rohan, Michael B. Purcell and Alex Chavdaroff rate eBay Inc (NASDAQ:EBAY) as a Hold. Analysts at the research firm believe activist interest in a Paypal spin has put long-term eBay shareholders in a tough spot.
We believe activist efforts to persuade eBay Inc (NASDAQ:EBAY) management to spin Paypal will fail, removing a key support for share prices. Three reasons: 1) Management has executed well over the last 5+ years, earning the right to chart its own course; 2) A Paypal spin might not create as much value as hoped, as Paypal would need to pay dearly to acquire the “free” Paypal members generated on eBay, depressing margins materially; and, 3) Competition in mobile payments has not threatened Paypal’s core payment volumes yet, reducing the urgency with which eBay must act right now. We remain on the sidelines.
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We believe activist interest in a Paypal spin has put long-term eBay shareholders in a tough spot.
eBay’s Team Has Earned Right to Chart its Own Course
eBay Inc (NASDAQ:EBAY) CEO John Donahoe and CFO Bob Swan, and its board of directors, are respected within the investor community, after 5+ years of solid performance. This makes it difficult for any activist investor to effect major corporate changes. This situation is very different than Yahoo!, as the board and management team never recovered from rejecting Microsoft Corporation (NASDAQ:MSFT)’s offer to buy Yahoo! Inc. (NASDAQ:YHOO) several years earlier and disappointing operational performance. Due to eBay’s management credibility, we believe activist efforts are likely to fail.
PayPal Spin Might Not “Work”
We think a spin would have only a short-term positive effect. One key issue: the eBay marketplace accounts for a material percentage of gross adds for PayPal and receives no compensation for that exposure, inflating PayPal margins. Assuming PayPal would need to spend to acquire those members after a spin, on eBay or elsewhere, the hit to margins would be huge. We estimate eBay Inc (NASDAQ:EBAY) subsidizes $500mn of marketing spend for PayPal, roughly 25% of total estimated Payments EBITDA in 2014. Second issue: Paypal seems to be going through a phase of flat-to-decelerating growth and declining margins, not a trajectory that leads to a high multiple as a stand-alone.
Mobile and Point-of-Sale Payments is Still Wide Open
Neither PayPal nor its competitors seem to have made significant progress challenging the use of credit cards at the point of sale. PayPal has several scale and cost advantages, but there is no clear winner yet. For more detailed thoughts on the mobile payments landscape, please see our colleague Chris Brendler’s industry note titled “PayPal Too Dependent and It’s Too Early; Now Is Not the Time to Spin ,” published today.