Looking back at the Carl Icahn and Elon Musk attempt to separate PayPal from eBay (EBAY +2.59%), it's rather hard to pick any positives from the whole debacle. A few months earlier, Carl Icahn had tried unsuccessfully to arm-twist Apple (AAPL +2.65%) into accepting his proposal to massively increase its share buyback program by not less than $50 billion.
In an ironic twist of fate, Carl Icahn has inadvertently achieved in eBay what he had hoped to achieve in Apple: increasing share repurchases. eBay has drastically increased its share buybacks in the current fiscal year in a move that appears to be well-calculated to placate the fiery billionaire investor.
eBay has never been a stock buyback champ, and usually repurchases just enough of its shares to counter stock issued from option exercises. The online auction giant rarely buys back more than $1 billion of its shares in any given year. But, this has changed dramatically, and eBay has already repurchased shares worth $1.75 billion so far this year.
eBay's outstanding shares have remained fairly constant over the years, as seen from the chart above. But, this year's buyback program is beginning to have a tangible impact on the company's outstanding shares, and the share count is starting to gradually come down. This might come as welcome news to eBay shareholders, who watched as the company's shares sat on the sidelines while many other stocks soared during last year's mega bull market.
Source: Thomson Reuters
eBay has been using part of its $9 billion in repatriated cash to finance the buybacks. The company chose to take a hefty $3 billion charge from the taxman to bring the money back home, instead of taking the Apple route and issuing bonds to finance its buyback program. Substantial share buybacks usually produce a positive effect on a company's shares, as seen below:
Whether eBay's share buybacks will provide some lift to its long-suffering shares remains to be seen. The company's investors are currently torn on what to make of eBay's hodgepodge of businesses. On one hand, the company has a strong presence in online payments in the form of PayPal.
On the other, eBay's marketplaces are growing stronger, and increasingly looking like Amazon's online business. eBay has introduced Amazon-like features in its e-commerce business, including a same-day delivery service, christened eBay Now. eBay also acquired Shutl, a U.K. start-up that has enjoyed great success with same-day deliveries.
eBay as a payment company
PayPal has been growing rapidly, and currently accounts for about 41% of eBay's revenue. The online payments platform's revenue expanded 20% last year, and 19% in the first quarter of the current fiscal year. eBay's marketplaces, as usual, grew at a slower pace than PayPal, only managing to record 10% growth during the quarter, while eBay's overall revenue grew 14% during the period. The two segments have maintained these growth rates for a couple of years now, and it appears as if this might remain the case for at least the next few years.
Last year, PayPal's growth bested that of the two leading card payment companies, MasterCard and Visa. But, the slower growth of eBay's merchandise segment placed the company's overall growth somewhere between MasterCard on the higher side and Visa on the lower side.
Both MasterCard and Visa trade at considerably higher P/E multiples than eBay. This was the gambit that Carl Icahn and Elon Musk played when trying to make their case, claiming eBay's merchandise segment was acting as a drag on the company.
Assuming that PayPal's growth holds steady at around 18%, while eBay's marketplaces continue growing at 10%, it will take approximately six years for PayPal's revenue to catch up to marketplaces'. At these rates, it would take nearly 25.5 years for PayPal's revenue to account for 80% of eBay's overall revenue. That time frame looks lengthy even for long-term investors, hence the uncertainty surrounding the company.
PayPal and Apple's mobile payments
eBay investors were not amused when Apple hinted at launching a mobile payment platform. Apple appears to be unrelenting in its bid and began interviewing senior payment industry executives last month, looking to fill two new positions in the company.
It's not clear whether Apple's mobile payments will cover transactions in physical stores alone, or also extend to mobile e-commerce payments. The second alternative would be a much bigger threat for PayPal, since the company processed mobile transactions worth $27 billion in 2013, or 15% of the total transaction volumes processed by the platform during the year. PayPal's mobile payment volume grew 99% last year.
Given Apple's history, it's highly unlikely that the company's mobile payment service will support Android. This would severely limit merchant interest in Android strongholds such as the EU, China, Latin America, Africa, and huge parts of mainland Asia.
Foolish bottom line
Carl Icahn and Elon Musk agitated for a breakup between eBay and PayPal. The two did not achieve their objective, but they have brought about an unexpected windfall for eBay shareholders in the form of a huge increase in the company's buybacks. This might offer some upward momentum for the stagnant shares.
