Why eBay Stock Popped 5% -- Then Gave Most of It Back

Morgan Stanley warms to eBay's idea of taking payments in-house.

Rich Smith
Rich Smith
Apr 18, 2018 at 3:04PM
Technology and Telecom

What happened

Investors clicked "buy it now" on eBay (NASDAQ:EBAY) stock this morning, bidding the shares up as much as 5.6% in early trading after analysts at Morgan Stanley announced a double-click upgrade on the stock -- from "underweight" to "overweight." Enthusiasm has waned as the day waxed, but as of 2:35 p.m. EDT, eBay shares are still up a respectable 2.7%.

So what

What is it that Morgan Stanley likes so much about eBay all of a sudden? In a word: money. More specifically, eBay is moving to bring payments for items sold on the online auction site in-house, phasing out its payments-processing relationship with PayPal (NASDAQ:PYPL) in order to "intermediate" such payments between shoppers and sellers itself.

eBay has promised investors that this move will "deliver value to customers through an improved shopping experience, enhanced selling tools and streamlined costs." Morgan Stanley believes the move will grow eBay's pre-tax earnings by 20% -- and its free cash flow by 60%.

The eBay logo

Image source: eBay.

Now what

Getting from here to there may take some time, however. Initially, eBay plans to shift only about 5% of payment activity (and in only two countries) from PayPal to its new partner, Adyen. It won't be until 2021 before the majority of eBay shopping will be processed through Adyen.

Still, eBay will benefit from increased merchant activity through streamlining the payments process, and increased revenues as it takes over the payments intermediary function. Morgan Stanley believes eBay could grow its free cash flow by 60% from today's level of $2.5 billion in cash profits generated annually -- a $1.5 billion increase.

Granted, in January, eBay itself told investors to expect only about a $500 million increase in operating profit from the change. The difference between what eBay is promising, and what Morgan Stanley thinks it can deliver, may explain why investors are starting to rethink whether today's upgrade news is as good as it first sounded.