Under previous but subsiding pressure from Carl Icahn and other shareholders, eBay (EBAY) announced last September that it would separate its payments business PayPal in July of this year. Now that July is here, we wanted to remind members of the split and explain what it means for the holdings in the Best Ideas Newsletter portfolio. On July 17, eBay shareholders will receive one share of PayPal under the ticker PYPL for each share of eBay owned. We will be launching coverage of PayPal shortly after it becomes an independent, publicly-traded company.
The separation of eBay and PayPal will make eBay leaner and more efficient while greatly increasing the potential for expansion of PayPal within the booming mobile payments market. As a distinct entity, PayPal now has the freedom to explore and engage in other business opportunities with other marketplaces and is prepared to hit the ground running after the spin-off. Already, PayPal has announced it will acquire digital money transfer provider Xoom (XOOM) for $890 million in cash. The addition of Xoom will extend PayPal’s existing US offering and accelerate its global expansion. Xoom’s reach spans 37 countries, including Mexico, India, China, Brazil, and the Philippines.
Life on its own won’t be a walk in the park for PayPal, and competition will be stiff. We think the strongest competitor over the long haul will be Apple (AAPL) via its Apple Pay segment. Apple’s reach and brand recognition is unparalleled, and the firm’s partnership with Stripe has further augmented its platform. Apple Pay also has the ability to support credit and debit cards on the payment networks of Visa (V), MasterCard (MA), and American Express (AXP). In its latest quarterly results, CEO Tim Cook says that he has seen “great momentum with Apple Pay.” Discover (DFS) will make contactless payments in relevant stores through Apple Pay beginning later this year, and during the month of March, the number of locations accepting Apple Pay tripled. Best Buy (BBY) and major hospitals across the country are signing up.
Amazon (AMZN) Mobile Payment Services is another competitor with significant reach and brand recognition and has similar ease-of-use features as Apple Pay, though we do not think its influence is as significant as the iPhone giant’s. The tokenization of major credit card processors will be an obstacle for PayPal, as MasterCard and Visa continue to innovate their data security services in order to capture the demands of online shoppers. Alibaba’s (BABA) AliPay arm, China’s leading third-party online payment solution, recently reached a deal with Wal-Mart (WMT) that will enable customers to use the Alipay Wallet to make purchases at participating stores in China. Alibaba has been rapidly expanding into India, and we wouldn’t be surprised to see it gain ground across the globe.
PayPal has not been asleep at the wheel though. The company’s One Touch technology, released April 2015, is a competing product to Apple Pay’s Stripe and the similar Amazon feature, and allows users to make payments on mobile platforms with the touch of a button. One Touch may have a material advantage over Stripe in that it can be used on iPhones and Android devices. The firm has been competing with Amazon as an eBay business for years, so we don’t expect any material share shifts in the payments landscape between the two.
Following the separation, PayPal will continue to handle 80% of eBay’s gross merchandise volume over the next five years through contractual stipulations. The stability of retaining eBay as a partner coupled with a distinct focus on its own standalone returns should provide ammunition to combat myriad threats. We were fans of PayPal as a segment of eBay, and our opinion will not change July 17, the date of the split. Our biggest fear is selling pressure on the legacy eBay position, as some investors may migrate to a full position in PayPal, but at the moment we plan to hold onto both stakes. We maintain our view that eBay, on a consolidated basis, is significantly underpriced, and the separation will unlock shareholder value.