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source: techcrunch
Headlines have been heavily focused on the news that eBay (NASDAQ:EBAY) was going to drop PayPal (PYPL) as its primary partner for processing payments, turning instead to Dutch-based Adyen.
One of the items listed as significantly detrimental to PayPal is that eBay accounts for 13 percent of total process volume (TPV) of PayPal in the fourth quarter, implying it would be a meaningful negative catalyst going forward. What isn’t mentioned by most news outlets is that the revenue generated by that 13 percent accounted for a little under 10 percent of PayPal’s sales in the quarter, or about $370 million, based upon revenue of $3.74 billion in the quarter.
The share price of PayPal plummeted 11 percent on the news, which also was triggered by lower guidance than the market was looking for.
In this article we’ll look at why this really isn’t a surprise for those following PayPal, and why the company is unlikely to be impacted meaningfully over the long term.
Operating agreement
PayPal and eBay have a five-year operating agreement in place that governs the spin-off. At this time it’s only halfway through the five-year period, which will end in July 2020.
The company pointed out that there will be no changes in the terms through the end of the agreement period, which was “meant to assure both the thoughtful and a smooth transition for both companies post-separation.”
On eBay’s part, it said the reason for the change was to provide lower costs to sellers, as well as additional options for buyers.
By 2021, eBay expects the majority of its global marketplace customers to have access to and be using the new system.
According to PayPal spokeswoman Amanda Miller, as quoted by CNN, the company will “continue to provide a comprehensive payments solution to eBay through July 2020.” The two companies also agreed that PayPal will be an option offered to customers of eBay through July 2023.
Impact on PayPal
For some time eBay has represented a declining percent of processing volume and revenue. As mentioned earlier, in the last quarter it was approximately 13 percent of TPV, down about 900 basis points over the last couple of years.
Last year in the same reporting period eBay accounted for 16 percent of TPV, and the year before that about 19 percent.
The company noted that based upon that ongoing downward trajectory, by the end of its operating agreement, eBay would account for somewhere around 4 percent of its TPV. The point is this was going to happen whether or not eBay went with Adyen.
Even if eBay accounts for a little more than that, PayPal will without a doubt make more acquisitions that will reduce the percent of processing volume represented by eBay, which means 4 percent is a reasonable figure to base our models on, and it could be even less than that, depending on the size of the acquisitions PayPal makes, as well as the types of deals it makes with many of the companies it’s working to build partnerships with.
PayPal also pointed out the terms of the existing operating agreement limits its ability to work with large companies operating in that market place. This will release a lot of potential after the agreement expires.
I agree with company management that this is a very manageable situation, and one it has been preparing for some time. I think many of those who sold on the headlines will regret it in the years ahead. Most of those following PayPal weren’t surprised by what happened, and most likely view it as an opportunity to buy the dip.
New partners and upcoming deals
One way to look at the eBay announcement was the one we already covered, which it was a declining part of the overall business of PayPal. And with growth in its existing business and acquisitions, this will continue to decline.
The other way to view it is in regard to recent business deals that will increase the amount of business done outside of eBay by more than the current 87 percent, as well as the deals currently being negotiated that will add to the top and bottom lines of the company.
PayPal noted that in the current quarter it entered into an international agreement with The Walt Disney Company, Dillards and QVC in North America, while adding ePrice in Italy, Dell in the UK, and BookMyShow and MakeMyTrip in India.
With QVC customers now having PayPal as an option, it could be a meaningful processing and revenue source if it takes hold, as QVC is number three in mobile commerce in the U.S., playing well into the mobile strategy of PayPal, as well as the third-largest in e-commerce in North America, according to Internet Retailer.
BookMyShow is the largest ticketing platform for online entertainment in India, and MakeMyTrip is the largest online travel company there.
PayPal has been operating for some time in India for international buyers. These plays also will move it toward working with major Indian merchants at the domestic level.
India is especially compelling because its leadership is pushing toward building a robust digital economy. This plays into PayPal’s strengths.
Less visible but with a lot of potential is the company “working closely with over 20 of the largest credit card issuers in the world.” The company said most of them have initiated campaigns “to encourage and in many cases incent customers to engage with PayPal.”
Some of the companies mentioned in its earnings report are Citi, FIS, Bank of America, Facebook Messenger, AliExpress and Baidu. PayPal is either working on entering into, launching or expanding existing agreements, as in the case of Facebook Messenger, with these and other companies.
Conclusion
The declining amount of payments processed for eBay by PayPal, potential acquisitions, and winning new business means moving away from PayPal as its main process will have very limited impact on PayPal.
If this announcement had been made a year or two ago, it would have had a more dramatic impact on PayPal. But with the company decentralizing and growing its customer base, eBay has been rapidly shrinking as a percentage of its revenue and TPV.
The argument could be made that it would be better for PayPal to retain its volumes with eBay while growing its customer base. That wasn’t going to happen because eBay and PayPal know each one will do better with the direction both are taking.
PayPal is facing a lot of competition in the payment processing space and needed to be shoved out of the eBay nest to learn to fly on its own. On the part of eBay, it needed to be able to look at a variety of payment processors in order to secure the lower costs for its business.
In this case, both of the companies are winners, and over the long term this is going to be a positive even for PayPal. It’ll push it to accelerate the pace of its negotiations, and possibly acquisitions.
When the smoke clears PayPal will be considered a much stronger company than it is today because of the eventual break with eBay. Again, PayPal will be a payment option on eBay through July 2023, and I would think, even though by that time eBay will be a very little piece of PayPal’s business, it will still allow PayPal as an option. That will depend on the payment processing market at that time and what type of demand is coming from eBay users.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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