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PayPal Shares Hit a New High Friday, but Ex-Parent eBay Is Struggling

By Motley Fool Staff - Oct 24, 2017 at 9:20PM

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The payment company’s earnings and revenue beat expectations in the third quarter, and Venmo made a big difference. But the e-commerce and auction site is lagging its rivals.

In this segment of the Motley Fool Money podcast, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Total Income's Ron Gross check in on the war on cash, as technology appears to be gaining ground.

The power of PayPal Holdings' (PYPL 2.23%) network, and the popularity of its various payment methods, keep luring in more money, more people, more purchases -- along with way more mobile action -- to the platform. In contrast, eBay (EBAY 2.93%), which spun PayPal off two years ago, is not attracting more users. The third-party sellers who are its bread and butter are more often heading over to (AMZN 3.15%).

A full transcript follows the video.

This video was recorded on Oct. 20, 2017.

Chris Hill: Shares of PayPal hitting a new all-time high on Friday, after third-quarter profit and revenue came in higher than expected. PayPal has a few payment methods in its portfolio, Jason, and Venmo, really getting it done this last quarter.

Jason Moser: And the war on cash continues. Feeling really good about this. I'll go as far as to say I think PayPal is a stock that virtually every investor should have in their portfolio. It plays into what I think is, in my book, the most attractive long-term trend out there in the move toward electronic payments.

And I think PayPal is a company that is really helping to guide the way. Clearly, a company that's winning in the space. And I think when you get to the size of their network and the dollars that are flowing through their model, it's a network that's going to keep on getting stronger, and I think it's going to continue to keep on winning.

When you look at some of these numbers, it's just amazing to think about. The top line was up 22%, earnings per share up 31%, they have 218 million active customers now and had $114 billion in payment volume that flowed through over the past quarter. That was versus $87 billion a year ago. Thirty-five percent of that's now coming from mobile devices. Remember we talked about Facebook, when they first went public, would they be able to make that shift to mobile? That was a question, I think, with PayPal. A very fair one. But clearly, they're doing the right thing there.

It's not even that expensive of a stock when you look at it. The trailing 12 months, $3 billion in free cash flow puts it around 26 times today. I think it's a high-quality business at a very attractive space for the coming decade and beyond. I own shares, we own shares in Million Dollar Portfolio, just called it out as a Best Buy Now. I think it's going to be a great holding for years to come.

Hill: Ron, I don't know about your kid in college, but my kid in college, back when we were in college and we needed money, we would be like --

Ron Gross: I had to cash a check.

Hill: -- Mom, Dad, can you send a check? And my kids are like, can you just Venmo me?

Gross: Yeah, Venmo's a big thing. My only problem with Venmo is, two people can't have a Venmo account that connects to the same bank account. My wife and I have one bank account -- we can't each have a Venmo. That's kind of annoying. I imagine they will remedy that in the future.

Hill: It was two years ago that PayPal was spun out from eBay. eBay also reporting earnings this week. Third-quarter results not great, Matty, and the guidance for Q4 wasn't particularly great, either.

Matt Argersinger: Yeah, the ugly sister of that breakup. Yes. With eBay, they actually had a somewhat decent quarter relative to the earlier expectations. But revenue, gross merchandise volume, only up around 9%. They call that a good quarter, but if you think about it, the overall e-commerce market in the U.S. is growing 14%-15% this year. So take that in context -- it seems like eBay is probably losing share in e-commerce. I thought the StubHub revenue up 5% was a little disappointing.

When I think about eBay, I think about a very profitable, strong e-commerce business, a company that probably will grow in the single digits, generates a free cash flow yield of 3%. That's something Amazon could only dream of. But it's just not going to grow. I think Amazon's vertically integrated approach to e-commerce, with fulfillment, shipping, payments, all those things combined, really gave them the edge with third-party sellers, which are vital to eBay. And so it's reflected in the stock. If you look at eBay and adjust for PayPal, eBay's stock price is up 75% over the last five years. Amazon is up over 300%. That's a pretty big disparity.

Hill: If they could go back in time a couple years, would they have been better off keeping PayPal in house?

Argersinger: No, I think the spin-off was ultimately good for both businesses. I think there was more value created that way. I just think if you go back in time, eBay has to make some bigger steps and follow more of the Amazon model than what they chose to do.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$109.56 (3.15%) $3.35
eBay Inc. Stock Quote
eBay Inc.
$42.89 (2.93%) $1.22
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$71.40 (2.23%) $1.56

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