The separation of eBay and PayPal creates an intriguing investment opportunity; eBay (EBAY, $61.04, market cap: $74 billion) will spinoff PayPal (PYPL) this summer (July 17). Following the separation, one company will focus on online commerce and the other on digital payments. This is an opportunity for both companies to increase focus on core capabilities and to operate with greater flexibility for success in their respective markets. eBay intends to focus on growing its 25 million sellers and 157 million active buyers, mainly small- and medium-size merchants, which constitute about 70% of the global retail market. PayPal, on the other hand, will focus on positioning itself as a full-service payments associate for consumers and merchants, managing mobile transactions, credit purchases and customer loyalty rewards programs. We expect that the tax-free spin-off will enable each company to operate more efficiently and optimize their capital structures.
eBay is one of the world’s largest online marketplaces; eBay.com is an online auction and shopping website through which customers and merchants buy and sell a broad variety of goods and services worldwide. It has 155 million active buyers globally and more than 800 million listings. With almost $83 billion in gross merchandise volume in 2014, eBay facilitates nearly 8% of the $1 trillion-plus global e-commerce market. Currently, eBay operates three segments: marketplaces, payments (PayPal) and enterprise. The enterprise segment enables commerce, retailing and digital marketing for merchants. eBay plans to sell or IPO this segment.
PayPal provides online payment solutions. The company offers web and mobile payment, online invoicing and request money services. It provides online services that enable individuals and businesses to securely, easily and quickly send and receive payments online. PayPal can be accessed through a broad range of mobile devices in about 200 markets worldwide and in 100 currencies. PayPal’s total payment volume of $228 billion in 2014 represented roughly 20% of the global online payment business (excluding food/grocery and online travel). PayPal represented 44% of eBay’s consolidated revenue in 2014. eBay currently represents 30% of total PayPal volume, which management expects will shrink to 15% during the next three years as more merchants accept PayPal.
With more than half of the world’s Internet users coming from developing countries and with low emerging-market penetration rates, we say that PayPal’s network is well positioned for solid growth. PayPal payment volume has grown at a 25% compound annual rate the past five years. We expect its payment volume will continue to grow, driven by increasing consumer adoption of mobile commerce (PayPal generated $46 billion in mobile payment volume during 2014).
Valuations into the spin
PayPal and eBay are expected to begin trading as independent publicly traded companies on July 20. We value eBay on a sum-of-the-parts basis and arrive at a consolidated price of $66.50 per share. This implies 10% upside from the current market price. We value PayPal at $45.65 billion, and a post spin share price of $37.25 (based on 27.5x estimated 2016 income of $1.66 billion). Our fair value estimate for eBay post split is $29.25 per share (15.0x FY16 estimated EPS).