eBay: Congrats On A Strategic Solid Deal To Fortify PayPal's Position

| About: eBay Inc. (EBAY)

Shares of eBay (EBAY) jumped up over three percent after the internet marketplace and payment provider announced the strategic acquisition to buy Braintree.

I applaud the deal, yet refrain from investing in eBay considering that I think shares trade around fair value. Yet this deal and continued growth has the potential to send shares to fresh all time highs during this holiday season.

The Deal

eBay announced that has agreed to acquire Braintree for $800 million in cash.

Braintree is an innovative payment platform focusing on online and mobile startups. While Braintree itself might not be so well known, the businesses who use the platform are. Key users include Airbnb, OpenTable, TaskRabbit and Uber, each of them disrupting traditional business models.

Braintree will remain a separate unit within eBay's PayPal business, with the current management team remaining in place. Braintree is known from Venmo which is its mobile application, making payments through mobile devices easily across social networks.

Braintree has been founded as recent as 2007 and is based in Chicago, having little over 200 employees.

CEO John Donahoe commented on the rationale behind the deal, "Braintree is a perfect fit with PayPal. Bill Ready and his team add complementary talent and technology that we believe will help accelerate PayPal's global leadership in mobile payments. Together, we expect that PayPal and Braintree also will accelerate our leadership in supporting developers who are creating innovative solutions for next generation commerce startups."

Excluding Braintree, eBay expects that PayPal will handle $20 billion in mobile payment volumes for the year. Braintree projects $12 million in payment volumes for the year, one third to be driven by mobile payments.

The deal will lead to a $0.01 per share dilution to non-GAAP earnings, and impact GAAP earnings by one to three cents per share.

The deal is subject to normal closing conditions, including regulatory approval . The deal is expected to close in the final quarter of this year. PayPal itself has 132 million accounts, processing 7.7 million payments every year.


eBay ended the second quarter with $10.4 billion in cash, equivalents and short term investment. The company has $4.5 billion in total debt outstanding, for a net cash position of $5.9 billion. As such, financing the $800 million deal should provide no difficulties.

Revenues for the first six months of the year came in at $7.62 billion, up 14% on the year before. Earnings rose by merely 4% to $1.32 billion. The company guided for full year revenues of $16 to $16.5 billion, while full year earnings could come in around $2.9 billion.

Trading around $56 per share, the market values eBay at some $73 billion, or its operating assets around $67 billion. This values eBay's operating assets at 4.1 times annual revenues and 23 times annual earnings.

eBay does not pay a dividend at the moment.

Some Historical Perspective

Long term shareholders in eBay have seen very decent returns. Shares rose from merely $10 in 2009 to recent highs of $58, as shares currently trade at $56 per share.

Between the calendar year of 2009 and 2012, revenues rose by a cumulative 61% to $14.1 billion. Earnings rose by 5% to $2.6 billion in the meantime.

Investment Thesis

eBay is traditionally best known from its marketplace, but the brilliant acquisition of PayPal for $1.5 billion a decade ago has paid off handsomely. Payment services are complementary to eBay's marketplace thereby boosting growth. Yet PayPal growth has been much more rapid than eBay's marketplace, as the business stands to overtake marketplace revenues at some point in time, which could come rather soon.

The latest deal with Braintree shows the focus on, and the ambitions of the company in the field. Braintree's technology and focus on mobile phone payments, could bolster PayPal's offering for online payments. The deal could be crucial going forward as competition with Google (NASDAQ:GOOG) and Square will be intense.

Back in December of last year I took a look at eBay's prospects. I concluded that the PayPal acquisition has been integral to eBay's success and will be the focus of the company going forwards, as eBay might transform into a technological payment company with the marketplace as a side business.

At the time I concluded the stock has moved too far, too fast in 2012. Note that shares rose from $30 to $50 in 2012. So far in 2013 the stock has mostly consolidated, trading in a $50-$58 trading range, currently around $56 per share. As earnings steadily rose, the price-earnings multiple dropped from 25 to 23 times earnings, still a bit rich.

So I like to think most of eBay's future growth and value is being represented by its PayPal unit, which might be seeing tougher times ahead as more companies will focus on the growing market.

The company has a prominent position on desktops, yet it faces regular complaints from vendors regarding excessive fees and transaction costs. Succeeding in mobile is another story as competition is starting to come in, which might put pressure on fees. Note that the company on average makes about 4% in commission on payment through website.

I remain on the sidelines, liking the long term prospects of the business. At the same time, competition might intensify, a reason why I like the aggressive move to buy Braintree to bolster the competitive position. At 23 times earnings, I think the business is somewhat fairly valued, and therefore remain on the sidelines.

Disclosure: I 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.