Earlier this week, eBay (EBAY) announced it would spin off its PayPal division. Activist investors urged management to "unlock" PayPal's value by separating the two companies. After the deal goes through about six months of approvals, eBay shareholders will receive shares in PayPal. The split is expected to be tax-free. The company also announced that former American Express (AXP) CEO Dan Schulman would become CEO of PayPal. So now what?
I believe you should sell the stock; take the money and run.
First, the split won't be effective for almost a year. Management expects the shares to be distributed sometime in the back half of 2015. Who wants to wait around for that? Second, if you want to own PayPal, you'll be able to buy the stock in the open market next year. Who knows what PayPal will be worth this time next year? Growth could slow. Margins could change. PayPal has to negotiate a payment deal with eBay, so eBay users can still use PayPal. Who wants that uncertainty? As a public company, PayPal will have higher expenses than it does now.
In the last 12 months, eBay reported revenue grew 10% to $9.9 billion. As a business, eBay threw off a 35% margin. PayPal, on the other hand, had 19% revenue growth to $7.2 billion. PayPal had a 25% margin. As a separate company, I would think PayPal's margins would come down simply because they will have more expenses to pay that are shared with eBay -- expenses such as public company expenses, marketing, accounting, legal and the like.
Why spoil a good thing? Together, the company was able to grow total revenue at a 26% annualized rate since PayPal was acquired in 2002. When PayPal was acquired, it had about $100 million in revenue. PayPal was the growth engine of eBay, producing a 46% annualized growth rate. Without PayPal, eBay would not be very attractive.
But management is making the argument that PayPal would be better off on its own since 71% of its transaction volume is coming from outside eBay. In other words, eBay helped PayPal to grow and become a payment powerhouse, but it has outgrown eBay. Transaction volume growth off eBay is growing at a 33% vs. just 25% on eBay. Supposedly, eBay is dragging PayPal down. Once separated, PayPal will be able to spread its wings and go after business it otherwise couldn't.
I don't buy it. To me, this is a Wall Street-manufactured split, designed to boost the stock temporarily. Hedge funds will sell into the pop and re-evaluate eBay and PayPal next year. Why sell the crown jewels?
Meanwhile, Apple's (AAPL) Apple Pay and other competitors have almost a year to get their acts together. PayPal boasts 152 million active accounts. But last April, Apple claimed more than 800 million credit cards on file. Apple has four times the number of active accounts of Amazon (AMZN), another potential payment competitor. Looked at it a different way, PayPal would be the third-largest payment platform. Who wants to be third?
IPhone users won't have to do anything new. Once they sign up, by taking a photo of their credit card, it's done. If they lose their phone, they can use the "Find My Phone" app to wipe the phone (and their personal information) clean from the phone. Merchants never handle the card or customers credit card information. Working with Stripe, Apple Pay will be able to use Stripe's one-touch buy technology. Users don't have to log in or add their shipping information. It's all stored away from the device. Just touch and buy. Merchants who use mobile payments love Stripe. PayPal's solution is more cumbersome since it isn't integrated into the operating system of the phone.
Since this whole transaction will take many months to play out, I'm sure we'll hear a lot more about it, but right now, I'm gone. I'd sell it and not think about it until next year.
At the time of publication, Laudani had no positions in the stocks mentioned.