Even though eBay Inc (NASDAQ:EBAY) narrowly beat consensus EPS estimates yesterday, it also lowered its revenue guidance causing its stock price to fall and now analysts are weighing in. Wedbush analysts Gil Luria and Aaron Turner have reduced their price target to $55 from $62 while maintaining their Neutral rating (currently $47).
“We believe both that PayPal will continue to grow at current rates and eBay Marketplace will recover gradually over the next few quarters,” write Luria and Turner. “However, we believe the separation of the companies may create more dis-synergies than expected.”
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eBay Marketplace headwinds should die down next year
Two of the main problems currently facing eBay Inc (NASDAQ:EBAY) Marketplace are the recent hacks that have undermined confidence in the platform and increased friction in sales. It might seem like a small matter to change your password, but a few extra steps can be enough to stop an impulse buy in its tracks. eBay is also getting less visibility because of changes in Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s search engine algorithm. eBay can adapt its SEO techniques to the changes to some degree, but it is also working to increase visibility through core users and social media.
Luria and Turner argue that these headwinds will die down over the next several quarters and that revenues at eBay Marketplace will return to higher growth towards the end of next year.
Investors shouldn’t rely on current eBay/PayPal profit split: Wedbush
Since Luria and Turner expect PayPal to get a much higher PE multiple when it eventually is spun off, they expect eBay to add as much value to PayPal as possible to maximize the total value of the two companies (they assign 25x to PayPal and 14x to eBay). However, they also think that commercial agreements between the two will favor eBay, which could cause PayPal to be less profitable than many investors expect at least for the first years.
Of course that only affects PayPal’s business with eBay Inc (NASDAQ:EBAY), and it’s the online payment services potential in the mobile wallet space that has investors really excited. eBay is going to start supporting payments through NFC (near field communication) terminals, and even if Apple Pay is able to dominate the iOS market, PayPal should be able to market its mobile wallet services aggressively to Android users.