Please ensure Javascript is enabled for purposes of website accessibility

What Investors Got Wrong About the eBay/PayPal Announcement

By Danny Vena - Updated Feb 8, 2018 at 2:35PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

While both companies are complying with the terms of the divorce, the details are important, and investors on both sides are overreacting.

When PayPal Holdings, Inc. (PYPL -5.42%) reported its fourth-quarter and 2017 full-year earnings after the market closed on Wednesday, investors got what they have come to expect from the digital payments processor: impressive year-over-year growth in both revenue and earnings.

What they didn't expect, though, was the announcement that eBay (EBAY -3.90%) will begin to process its own payments, with the help of privately held PayPal competitor Adyen. Many had expected a renewal of the operating agreement that was forged when the two companies separated.

The news sent PayPal's stock reeling, falling as much as 10% following the announcement, while eBay's stock jumped as much as 15%. As in any divorce, the two companies are telling slightly different versions of the story, with the reality falling somewhere in between.

Woman at a desk grabbing her head with both hands in shock as she looks at a laptop.

Investors' initial reaction missed certain key facts. Image source: Getty Images.

From eBay's perspective

eBay revealed during its conference call that it had made the decision to "intermediate payments" and that it would be gearing up as quickly as it was allowed under the terms of its operating agreement with PayPal. eBay said it had reached a deal with privately held global payment processor Adyen to be its partner in the endeavor, and that by 2021 it expects that the majority of its customers will be using its new payment platform. 

The motive for this move was, of course, money. eBay believes it will be able to capture significantly better economics while reducing overall selling costs. It's also hoping to provide sellers more choices, but eBay will become the payment processor of record and earn the fees it previously relegated to PayPal. eBay also expects to pass some of the savings along to its sellers and expects that the associated fees will add incremental revenue of more than $2 billion annually.

What PayPal said

PayPal indicated that payments from eBay's marketplace represented only 13% of payment volume in the fourth quarter, down from 16% in the prior-year quarter, and about 22% when the two companies separated. PayPal expects that by the time the operating agreement expires in 2020, eBay will generate only about 4% of PayPal's payment volume. 

While PayPal's business has been experiencing significant growth, the eBay portion of that business has been growing much more slowly, according to PayPal. During the 10 quarters since parting ways, the eBay portion of PayPal's revenue has grown by an average of only 4%, while the remainder of PayPal's revenue has increased by 23%. 

PayPal was also quick to point out that under the terms of the operating agreement, it is prohibited from being the merchant of record for a number of specific eBay competitors, including some of the largest and fastest-growing online marketplaces worldwide. PayPal is in discussions with some of those names now, but it won't be able to partner with them until the operating agreement expires.

What they agree on

There are a few things that both eBay and PayPal agreed upon. The operating agreement the companies signed is still in effect and won't expire until July 2020.

The agreement stipulates that eBay may begin testing new payment processors beginning in 2018, accounting for up to 5% of its payment volume in two countries of its choice. The amount of payment volume it is permitted to migrate increases to 10% in 2019, and the operating agreement expires in July 2020, when PayPal is likely to relinquish the remaining payment processing duties for eBay. It will, however, still be a payment option for customers.

In a blog post on its website, eBay acknowledged the limitations:

eBay will begin payments intermediation on a small scale in North America starting in the second half of 2018, expanding in 2019 under the terms of the Operating Agreement with PayPal. In 2021, we expect to have transitioned a majority of marketplace customers to the new payments experience. 

Not much is changing

While investors on both sides appear to have had a knee-jerk reaction to the announcement, nothing much has changed. For now, PayPal will be losing about 5% of its payment volume from two countries. For its part, eBay will retain the fees from those same payments it would otherwise have paid to PayPal. The terms of the agreement have been in place since the companies went their separate ways.

Move it along, folks. There's nothing to see here.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$71.82 (-5.42%) $-4.12
eBay Inc. Stock Quote
eBay Inc.
$42.65 (-3.90%) $-1.73

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.