Why eBay Inc's Marketplace Business May Be the Real Gem Following the Paypal Spinoff
The big story surrounding eBay Inc right now is that management has finally decided to split its Marketplace and PayPal businesses into two separate entities. While this move isn't expected to be completed until mid-2015, many investors already consider PayPal to be the gem of this particular separation. However, investors may be discounting several elements that make Marketplace a key investment opportunity following the split.
Marketplace and the generation of income
Following the split, Marketplace and its smaller Enterprise segment will remain eBay, while the other entity will be known as PayPal. As for the former, it creates revenue mostly from fees on bidding and from sellers who use Marketplace as a platform. EBay's Marketplace has served as a great platform for both large retailers that earn commissioned incentives, like part of Amazon.com's business, and small individual sellers. Yet, while most e-commerce platforms like Amazon.com create revenue from the sale of a product, eBay's decision to generate revenue from fees allow the service to be highly profitable, with an operating margin over 40% last year.
According to eBay, its Marketplace and Enterprise segments handled $85 billion in gross merchandise volume and sales, collectively, during the last 12 months. The Enterprise segment created just $1.1 billion in revenue last year, and refers to eBay's partnerships with other e-commerce providers to offer complimenting services like fulfillment, accounting, Web stores, etc. Also, revenue for the Marketplace and Enterprise segments has grown 10% during the last 12-months, to $9.9 billion.
All things considered, once Marketplace and PayPal are split, eBay will be a highly profitable entity, one that earned $3.35 billion in operating income during the last year. For investors, this strong generation of income, combined with eBay's willingness to be shareholder-friendly, via measures such as stock buybacks, might be a great sign that the new eBay will create significant shareholder value in the future.
A look at the new eBay, and PayPal
Marketplace generated an operating margin of more than 40% in 2013. If sustainable, eBay's stock would trade at less than 17 times 12-month operating income right now. In comparison, Amazon.com has created $616 million in operating income over the last four quarters, therefore its stock is trading at 241 times 12-months operating income. Given Marketplace's 10% growth, 17 times operating income is not an expensive price to pay for investors.
During the last two years, eBay has grown increasingly shareholder-friendly with buybacks. Since 2012, eBay spent $5.2 billion to buy back its own stock. Following the split with PayPal, the majority of eBay's free cash flow will remain intact, so aggressive buybacks could follow.
PayPal's valuation is still unknown, but many on Wall Street believe that it's worth about half of eBay's $65 billion current market capitalization. Others, such as Elon Musk, a PayPal co-founder, actually think that PayPal could be worth $100 billion as a stand-alone company, as it would then be able to operate independently. Yet, more than likely, PayPal will remain closely tied to eBay, even after the spinoff.
How could the spinoff work?
Typically, when a company spins off an asset, it offers the market a percentage of shares, then keeps the rest. A classic example is with EMC Corporation, which spun off a 10% stake in VMWare several years ago. EMC has since sold additional shares, now owning 80% of the company.
The amount of tax-free cash eBay will receive will depend on the number of shares that eBay owns following the spinoff. But, given eBay's tendency in recent years to buy back stock, there's a good chance that it will use much of that cash, if not all, to buy back stock, or pay a special dividend to shareholders. Since Marketplace's operations are not grossly overvalued, any additional buybacks should be welcomed as a way to increase the value of shares.
PayPal's split will likely create value for eBay investors, because it will give the company cash that it can then use for either buybacks, or to invest back into the business. The key takeaway for me is that Marketplace's significant operating profits are more than enough to justify the market capitalization of eBay. Therefore, the cash it receives from PayPal's spinoff is a luxury that the company will likely use to buyback stock, judging by its recent history. If so, eBay stock becomes a great investment opportunity following the split with PayPal.
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The article Why eBay Inc's Marketplace Business May Be the Real Gem Following the Paypal Spinoff originally appeared on Fool.com.Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, and VMware. The Motley Fool owns shares of Amazon.com, eBay, EMC, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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