eBay (EBAY) and PayPal (PYPL) are no longer the same company.
As we had previewed in the pre-split piece, once shares of eBay and PayPal started trading individually, shares of legacy eBay fell and PayPal soared. But that’s merely semantics. At the end of the day, eBay and PayPal had jumped a combined 4%+, and we continue to believe both are underpriced.
The Best Ideas Newsletter portfolio will be updated to factor in the split-up upon publishing of the August edition on the 15th. We plan to update our 16-page report on eBay and launch independent coverage of PayPal following its first full quarter as a standalone entity. Let’s walk through their last quarterly results as a combined entity to set the foundation for further coverage.
On July 16, eBay, which included both eBay and PayPal at the time, reported solid second-quarter results, led by payments business PayPal. As a combined entity, the firm grew net revenue 7%, to $4.4 billion. The firm’s adjusted operating margin advanced more than a percentage point, and net income from continuing operations leapt 5%, to $931 million. Diluted earnings per share from continuing operations grew 10%, to $0.76.
Though eBay Marketplaces reported a 3% decline in reported revenue to $2.1 billion, currency headwinds negatively impacted reported revenue growth by 8 points. Gross Merchandise Volume (GMV) grew 6% on a currency neutral basis to $20 billion, and the business gained 2.1 million new buyers in the period, an increase of 8%. Though growth in active buyers has slowed on a year-over-year basis as a result of “friction from the cybersecurity incident,” management is encouraged by the currency-neutral GMV growth and year-over-year sold-item growth of 9.5% in the quarter.
PayPal’s performance was even better in the quarter.
The business grew its Total Payment Volume (TPV) by 28% on a currency-neutral basis to $66 billion from the year-ago period. PayPal’s Merchant Services volume advanced 36% on a currency-neutral basis, and its on-eBay volume grew 6% on a currency-neutral basis, now representing 22% of TPV. New active accounts increased during the quarter, growing 11% on a year-over-year basis to 169 million, and monetization per active user increased sequentially to $50 per year from $49 in the first quarter of 2015. Additionally, the number of transactions per active account advanced to 24 in the second quarter of 2015 from 21 in the year-ago period. These strong trends led to reported revenue growing to $2.26 billion, an impressive currency-neutral 19% year-over-year growth rate.
eBay also offloaded eBay Enterprises. A consortium of equity firms and asset managers recently announced that they had signed a definitive agreement to acquire the business from eBay for $925 million. The transaction is expected to close in the second half of 2015. Contributions from the enterprises business to overall financial performance were negligible in the quarter and were recorded as discontinuing operations. The shedding of the business will allow eBay Marketplaces to focus on accelerating only its own momentum following the split of PayPal. We like the move.
PayPal is expected to grow considerably faster than eBay in 2015, with anticipated growth rates of 15%-18% and 3%-5%, respectively, on a currency neutral basis. Non-GAAP diluted earnings per share guidance for the year is a range of $1.23-$1.27 for PayPal, excluding impacts from the pending acquisition of Xoom, and a range of $1.72-$1.77 for eBay.
As we have outlined in prior articles, the PayPal split makes sense for both of legacy eBay’s core businesses, and the sale of the enterprises segment ensures that the new, slimmer eBay is not dragging any dead weight as it moves forward with greater focus on solely its own growth. On a consolidated basis, we thought eBay’s businesses were underpriced, and the separation should further unlock shareholder value, in our opinion. Our research on eBay and PayPal will be dynamic in coming quarters, so interested investors should check back periodically.