Dear Mr. Berko: Last year, I bought 200 shares of eBay in my Schwab account at $56 because several analysts believed that its revenues and earnings would take off that year and this year. It appears that I made the wrong decision. I didn’t expect the PayPal spinoff, and now I don’t know what to do. Should I hold eBay and PayPal, sell one of them and keep the other or sell both and walk away? At the current prices, I’d break even if I sold both of them today. Please advise.
— L.B., Akron, Ohio
Dear L.B.: I can’t tell you much about PayPal (PYPL-$32.08), which was recently and reluctantly spun off from eBay at the insistence of Carl (der Monster) Icahn. However, I can tell you it’s using the same ticker symbol that it used prior to being acquired by eBay in 2002 for $1.5 billion. Some say eBay (EBAY-$25.74) may have been killed dead because PYPL’s $9.2 billion of revenues accounted for about half of its expected 2015 revenues. Management and the board strongly opposed the PYPL spinoff. However, during the past two years, EBAY’s performance began to slip, and der Monster convinced EBAY’s board that a breakup would unlock the separate earnings capabilities of both businesses and shareholders would benefit. So far, they haven’t. Today, there is some serious and intense competition from new market entrants, such as Stripe, Alibaba, Google’s Android Pay, Apple Pay and other mobile payment systems — for example, Facebook’s “buy” button, which will transform this market in the coming years.
PYPL is the largest digital payment solutions company, for consumers and merchants, in the known universe. Its digital wallet securely (we hope very securely) contains payers’ and payees’ account data, and its platform is smoothly technology- and platform-agnostic — meaning that it is interoperable among various software systems. PYPL’s 169 million users and its 10.3 million merchants, including 71 of the top 100 online retailers and 60 of Europe’s top-of-the-line retailers, provide an impressive economy of scale. However, PYPL’s active user growth — 15.5 percent in 2014 — has begun to slow. Last quarter, the company reported an 11 percent increase, and those increases may keep decreasing.
Because you have 200 shares of EBAY, your account at Schwab will be credited with 200 shares of PYPL. J.P. Morgan’s Tien-tsin Huang calls PYPL a “gorilla among the independent digital payment services” and believes that the stock can trade at $48 in the next dozen months. Wells Fargo’s Timothy Willi contends that PYPL’s recent acquisition of digital payment companies Braintree and Paydiant will strongly grow the company’s mobile business. Mobile transactions are up 68 percent this year and account for 30 percent of PYPL’s transactions. Willi thinks PYPL can grow its share earnings by 20 percent annually during the next few years and values the company between $43 and $45 in the coming year. And Nomura Securities’ William Carcache comments that PYPL’s separation from EBAY will allow the company to partner and prosper with other companies that, under the aegis of EBAY, were previously off-limits. Carcache has a target price of $46 for the next 12 months. Then Susquehanna International Group’s James Friedman — citing the huge buying power of PYPL’s 169 million customers, its technological expertise in helping merchants, its Paydiant customer base and its Braintree acquisition — suggests that PYPL can be a $75 stock. And TheStreet’s voluble Jim Cramer says PYPL could trade to “$50, based on the 2016 earnings estimates.” But Piper Jaffray’s Gene Munster has an “underweight” rating on PYPL, with a $30 target price, based on his expectations of increasing competition over the coming years and several new competitive initial public offerings over the coming eight to 24 months. I agree with Munster.
