eBay, Inc. Looks to Trump the Market Once Again

When rumors surfaced in August that eBay (EBAY -0.14%) was thinking about splitting off its PayPal business as early as 2015, it initially came as a surprise. As I noted at the time, not only had Carl Icahn just backed down from his PayPal-centric activist investor role a few months earlier, but such a move would also seem to contradict the stance eBay CEO John Donahoe voiced during the company's most recent quarterly call in July.

But Donahoe did mention that the company will "continue to be open-minded to alternatives." And considering eBay just confirmed its intentions to do just that through a tax-free spin-off of PayPal in late 2015, you can bet management will come prepared to field plenty of questions on the topic when eBay announces third-quarter results Wednesday after the bell.

For now, however, eBay and PayPal are still being reported as one cohesive unit. So let's review what the market is expecting headed into Wednesday's report:

Source: Yahoo! Finance

For reference, analysts seem to be growing accustomed to eBay's habit of exceeding their models; both their EPS and sales estimates sit at the high end of eBay's own guidance, which calls for revenue in the range of $4.3 billion to $4.4 billion, and adjusted earnings per share of $0.65 to $0.67. Even so, eBay stock has still fallen around 7% over the past year and currently looks enticing to value seekers trading at just 15 times next year's expected earnings.

In theory, some of that value should be unlocked through the separation of these two businesses, which originally came together when eBay acquired PayPal for a measly $1.5 billion in 2002. Since then, the synergistic relationship between eBay and PayPal has enabled them to collectively grow both revenue and earnings at impressive 26% and 25% clips, respectively:

CAGR calculated from 2002 to last 12 months. Last 12 months from Q3 2013 to Q2 2014. Credit: eBay.

That said, PayPal is no longer the dependent business investors knew when it was first acquired. In 2002, a full three-quarters of PayPal's transactions came through eBay. By 2008, that number had fallen to 51%. Over the 12 months preceding the end of Q2, only 29% of PayPal's transaction volume came from its auctioneer parent. And last quarter, PayPal's merchant services total payment volume jumped 33%, which translated to 20% growth in net revenue to $1.95 billion. Investors should keep their eyes peeled on Wednesday, then, for whether PayPal is able to continue sustaining that impressive growth as it prepares to go solo. 

But eBay's core Marketplaces business is no slouch, either. In Q2, Marketplaces grew gross merchandise volume by 12%, which led to revenue growth of 9% year over year, to $2.17 billion -- and that was despite the effects of a nasty cyber attack that affected 233 million customers, as well as negative search engine optimization updates from Google. Assuming the fallout from those two issues has largely passed, don't be surprised if eBay's Marketplaces segment shows signs of picking up steam.

Investors should also look for other signs that both PayPal and eBay will be able to thrive and accelerate that growth as independently managed businesses. One would hope, for example, the subsequent conference call will include new hints at post-spinoff opportunities each will be able to pursue -- say, for instance, the possibility that other online retailers such as Amazon.com might consider embracing PayPal once it's no longer tethered to a perceived competitor.

In any case, you can bet we'll be there to touch base and add perspective once the report hits the wires. In the meantime, feel free to chime in with your thoughts using the comments section below.