Value Investing

Dylan Adelman 2017 Sohn Conference Long Thesis eBay Inc, Short Paypal

Dylan Adelman presentation from the 2017 Sohn Conference discussing his long position in eBay Inc., Short Paypal pitch

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A contrarian thesis inside of a contrarian thesis?

  • The standard contrarian thesis on eBay is excellent. The company is a stable grower falsely seen as a melting ice cube, has temporary unpopularity, is aggressively repurchasing undervalued shares, has a fast-growing earnings stream from StubHub, and trades at a reasonable valuation.
  • This is not the standard contrarian thesis. Two additional factors indicate that eBay has 46% upside from current levels. These factors relate to eBay’s post-spinoff operating agreement with PayPal (“Merchant of Record”) and to its Classifieds Group segment (“Classifieds”). 5-year IRR equals 24%.
  • 46% upside? This excludes the merits of the standard contrarian thesis. eBay’s Marketplaces and StubHub segment are given more conservative valuations than sell-side consensus estimates in this presentation.
  • Bonus Prize: Part I of this pitch doubles as a short thesis on PayPal.

Dylan Adelman eBay

Part I - Merchant of Record

“It’s important to realize that losing even half the eBay volume might have destroyed PayPal as a business […] eBay owned the platform and the checkout line. In hindsight, it’s a miracle they didn’t thrash PayPal.” – David Sacks, First COO of PayPal (2014)

Not quite the Shakespeare play.

eBay-PayPal Relationship

  • eBay acquired PayPal in 2002 to serve as its merchant of record. This provided costless new users to PayPal while giving eBay an in-house payments processor.
  • As eBay’s merchant of record, PayPal intermediates every transaction. Buyers pay PayPal, and PayPal pays the seller. PayPal takes a ~3.5% fee from the buyer and pays a ~1% fee to the acquiring merchant bank that processes in bulk. The spread is PayPal’s profit.

Everyone Else in 2017

  • All major e-commerce sites are merchants of record. Some of these payment processors, such as Alibaba’s AliPay, have gained traction outside their websites.
  • The downsides to being a merchant of record are the risks of chargebacks and customer service costs. The upside is a 2.5% spread on gross merchandise volume. For the largest e-commerce sites, being a merchant of record is thus a substantial profit center.

eBay can become a merchant of record by serving as its own payment intermediary, rather than outsourcing to PayPal. This would provide a 2.5% profit spread on eBay’s ~84 billion GMV.

Someone forgot to disclose “key customer risk.”

Benefits to PayPal

• In response to a proxy for splitting eBay and PayPal led by Carl Icahn, management noted on 3/24/14:

Dylan Adelman eBay

“Tightly integrated with eBay, PayPal can grow faster and more profitably than it would as a standalone company. Adoption and use of PayPal on eBay enables innovation and growth off of eBay. For example, eBay delivers about 30% of PayPal's new users at virtually no cost, more than 30% of PayPal's revenues and approximately 50% of PayPal's profits. PayPal's growth and leadership in mobile payments has occurred precisely because of this strong base of PayPal users on eBay.” – 3/24/14

Benefits to eBay

Dylan Adelman eBay

Why does eBay continue this one-sided relationship?

See the full slides below.