Credit Card and Paypal
North America Equity Research
26 June 2009
eBay, Inc
An in-depth look at PayPal's Business
With eBay focusing on PayPal as the primary engine of its growth, we take a deeper look at the value of the Payments unit, and its growth opportunities over the coming years. We continue to believe the upper range of the company’s outlook for $4B-$5B in F’11 revenues could be difficult to reach, but think $4B could be achievable. At a 20x multiple to our F’11E segment Net Income, the PayPal business would be worth $9B. • Off-eBay growth will be key. We estimate that, by 2011, eCommerce and online travel will combine to be over $1 trillion worldwide, up from $770B in 2008. By our estimates, PayPal accounted for ~4.2% of the off-eBay volume of combined eCommerce and travel last year. We believe the number would need to rise to more than 6.0% in F’11 in order for the company to meet the low end of its F’11 revenue target. • Increasing on-eBay penetration remains a driver. The maturation of PayPal in international markets can be a key catalyst for increasing penetration, as the low-hanging fruit on the domestic site has largely been picked. Further, expanding credit offerings to make PayPal a viable option for higher-ticket items can help offset sluggish GMV growth. • BillMeLater should improve longer-term funding mix. Segment margins in the two quarters since the BML acquisition have been down 500 bps Y/Y. However, because BML is funded through ACH, we think it can improve PayPal’s funding mix, and eventually drive better margins. • Brand is a valuable asset. Alone among online-only players, PayPal has established a payment brand to compete with incumbent players such as Visa and MasterCard. We believe PayPal can continue to push penetration as an alternative payment platform; alternatively, PayPal could try to expand its footprint in the payments ecosystem and become a merchant acquirer, focusing especially on smaller and mid-size merchants. eBay, Inc. (EBAY;EBAY US)
26 June 2009
eBay, Inc
An in-depth look at PayPal's Business
With eBay focusing on PayPal as the primary engine of its growth, we take a deeper look at the value of the Payments unit, and its growth opportunities over the coming years. We continue to believe the upper range of the company’s outlook for $4B-$5B in F’11 revenues could be difficult to reach, but think $4B could be achievable. At a 20x multiple to our F’11E segment Net Income, the PayPal business would be worth $9B. • Off-eBay growth will be key. We estimate that, by 2011, eCommerce and online travel will combine to be over $1 trillion worldwide, up from $770B in 2008. By our estimates, PayPal accounted for ~4.2% of the off-eBay volume of combined eCommerce and travel last year. We believe the number would need to rise to more than 6.0% in F’11 in order for the company to meet the low end of its F’11 revenue target. • Increasing on-eBay penetration remains a driver. The maturation of PayPal in international markets can be a key catalyst for increasing penetration, as the low-hanging fruit on the domestic site has largely been picked. Further, expanding credit offerings to make PayPal a viable option for higher-ticket items can help offset sluggish GMV growth. • BillMeLater should improve longer-term funding mix. Segment margins in the two quarters since the BML acquisition have been down 500 bps Y/Y. However, because BML is funded through ACH, we think it can improve PayPal’s funding mix, and eventually drive better margins. • Brand is a valuable asset. Alone among online-only players, PayPal has established a payment brand to compete with incumbent players such as Visa and MasterCard. We believe PayPal can continue to push penetration as an alternative payment platform; alternatively, PayPal could try to expand its footprint in the payments ecosystem and become a merchant acquirer, focusing especially on smaller and mid-size merchants. eBay, Inc. (EBAY;EBAY US)