EBay Shares In Focus Ahead Of PayPal Split

Shares of eBay Inc. (EBAY - Analyst Report) rose 3.4% in Thursday's trading session to $65.59, after the company reported better-than-expected earnings of 63 cents for the second quarter of fiscal 2015, beating the Zacks Consensus Estimate.

Revenues jumped 7% from the year-earlier quarter to $4.38 billion. Sales were driven by higher demand in the PayPal business, while the Marketplace business fell 3%, hurt by a strong dollar.

The results showed that PayPal continued to enjoy higher rates of growth and stabilization in the marketplace business.

However, the earnings report came on the eve of its split from the PayPal payments unit; making this the last quarter in which eBay and PayPal reported as a unified entity.

The Spinoff

The separation will be completed today. Both companies will become independent and start trading publicly. PayPal will begin trading on Jul 20 on the Nasdaq stock exchange under the stock symbol PYPL. eBay's ticker will remain unchanged.

eBay stockholders on record as of Jul 8 will receive one PayPal common stock against each eBay share. The distribution of PayPal stock will take place today. Goldman, Sachs & Co. and Allen & Company LLC are serving as financial advisors and Wachtell, Lipton, Rosen and Katz is serving as official counsel for the separation and distribution.

What Happens After the Separation?

Following the separation, one company will focus on online commerce and the other on digital payments. This is an opportunity for both companies to increase focus on core capabilities and operate with greater flexibility for success in their respective markets.

eBay aims at reinvigorating its Marketplace business. It intends to focus on growing its 25 million sellers and 157 million active buyers, mainly small- and medium-size merchants, which constitute about 70% of the global retail market.

PayPal on the other hand will focus on positioning itself as a "full-service" payments associate for consumers and merchants, managing mobile transactions, credit purchases and customer loyalty rewards programs. PayPal is already gearing up to sustain itself in the fast growing digital payments market. It recently acquired Xoom Corporation, a service for international money transfers, which will enable PayPal to sell international transfers to its U.S. customer base of nearly 68 million, by cross-selling Xoom’s services. It will also accelerate expansion of PayPal services into the overseas money transfers market.

However, eBay and PayPal will continue operating under a five-year contract to assure a dependable source of revenues for the latter after separation. However, both the companies will be free to partner with new retailers and other financial firms.

Last Word

PayPal has been the fastest growing division for eBay for quite some time now and has been surpassing eBay’s marketplace revenue (as displayed in the recent results also).

Though the Marketplace division has also been growing, the pace of growth has been slower, due to sluggish sales and user growth after a data violation last year, which compelled customers to change passwords. Google’s (GOOGL - Analyst Report) change in its search engine also reduced eBay’s traffic. Furthermore, it faces stiff competition from the likes of Amazon Inc. (AMZN - Analyst Report) and Chinese e-commerce retailer Alibaba (BABA).

Though things might look very rosy for PayPal, it is important to remember that the online payments business is moving rapidly to the mobile devices platform, where PayPal does not have a dominant presence. Management painted an optimistic picture on the call and both VenMo and the PayPal brand could help it some. But it will face stiff competition from mobile wallets like Apple (AAPL - Analyst Report) and Android Pay and online payment service from Alibaba and other retailers.

On the other hand, eBay’s business has been bolstered by PayPal’s strong growth. So without PayPal, eBay’s growth rate is likely to come down. However, the company will no longer be required to invest in Paypal’s growth, which could mean it will generate higher profits and cash.

eBay currently has a Zacks Rank #2 (Buy).