Bloomberg and Marketwatch are reporting that eBay EBAY has new plans for independent operation after the expiry of its existing operating agreement with PayPal PYPL signed when the two companies separated for greater operational flexibility.
Accordingly, it appears that the agreement, which expires in the middle of 2020, will not be renewed. Specifically, what it means is that eBay will not be promoting PayPal to its customers any more, nor will it try to maintain PayPal penetration on its platform at around 80%, Paypal will no longer devote resources to build payments products for eBay. Also, PayPal can build its own marketplace if it so chooses and eBay will be able to build its own payments platform, as required.
The news stories say that PayPal will remain a payment option for eBay customers until at least 2023. While they don’t say anything about the current data sharing arrangement between the two, eBay is now expected to take over payments intermediation from PayPal meaning that it will be processing customer payments itself and distributing to sellers. For the purpose, it will be collaborating with a Dutch company called Adyen. eBay expects this to lower payments processing costs for sellers.
Chief Financial Officer Scott Schenkel said in a conference call that “In the new intermediation model, we will simplify our relationship with sellers and plan to charge them a single fee for our Marketplace and payment services”. So basically, the fees paid to PayPal earlier will be split between eBay and Adyen and also adjusted against amount due from sellers.
This is naturally a huge positive for eBay, which should see a jump in both revenue and profitability.
In PayPal’s case, it is of course a big negative. PayPal Chief Executive Daniel Schulman called it “the best possible outcome for PayPal.” CFO John Rainey said that “There’s nothing about what’s been announced today that changes our thoughts on our ability to continue to grow our top line and bottom line after the operating agreement.”
PayPal spokeswoman Amanda Miller said, “The planned evolution of our relationship with EBay is consistent with our strategic direction and growth opportunities and does not alter our financial guidance.” These sound like brave words, because it can’t possibly be easy to replace a big and lucrative revenue source. At the same time, nothing is expected to change overnight, so there won’t be any impact on immediate guidance. There’s also nothing to suggest that Paypal won’t be able to acquire the technology or partnerships within the next 5-6 years that can generate continued growth for the company.
eBay currently has a Zacks Rank #5 (Strong Sell) while PayPal has a Zacks Rank #3 (Hold). So none of these stocks are recommended at the moment. For exposure to the space, it’s better to consider stocks like MeetMe MEET, Castlight Health CSLT, HubSpot HUBS, or Nice Systems NICE, all of which have a Zacks Rank #2 (Buy). Or, simply take a look at the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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