- eBay has become an Internet commerce powerhouse and an impressive, hard-to-duplicate payment platform.
- PayPal could be to eBay, as Alibaba is to Yahoo.
- We think eBay is worth nearly $80 per share at the time of this writing.
No longer is eBay (NASDAQ:EBAY) a simple auction website. With PayPal, eBay has become an Internet commerce powerhouse and an impressive, hard-to-duplicate payment platform. If this weren't enough to get investors excited about the company's stranglehold on the Internet, Carl Icahn is taking some major steps to coerce the market to recognize eBay's true intrinsic value.
The activist guru is encouraging management to conduct an initial public offering (IPO) of PayPal, a move that we think will unlock shareholder value. We've seen companies spin off subsidiaries many a time before, the most recent planned offering is Yahoo (NASDAQ:YHOO) and Alibaba, for example. Yahoo has performed wonderfully in light of the monetization and increased liquidity of its investment in Alibaba, and we think a similar "premium" can be unlocked should eBay spin off PayPal in a controlled IPO. We say controlled, as both Icahn and eBay's top brass think the deal would only make sense if eBay and PayPal continue their existing business relationship in a secure and enduring capacity.
An IPO of PayPal would also allow new management of the separated publicly-traded entity to pursue strategic investments to keep PayPal ahead of behemoths such as Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) that are looking to enter the payment space, but do not (yet) have the same comparable scale and product offerings. Outside of the eBay umbrella, PayPal becomes a more focused entity, with a dedicated management team, and an open market that will price its value more appropriately, eliminating the company's embedded discount within the consolidated eBay.
In any case, our stance has been that, while we like the idea of the IPO of PayPal, we like the idea of Icahn forcing the market to evaluate eBay and PayPal on a standalone basis even more. Alibaba, for example, had been stuck under the Yahoo umbrella for years, and it wasn't until the path to Alibaba's IPO that Yahoo's ownership stake in the firm translated into significant pricing gains for Yahoo shareholders. We think eBay is in the early innings of this path, and we're excited about the pricing upside.
On a fundamental basis, eBay continues to execute. ChannelAdvisor (NYSE:ECOM) recently released same-store sales of eBay in March, and we liked the performance. According to ChannelAdvisor, March "saw a 'thawing out' with most e-commerce channels posting increased same-store sales growth in March compared to February." eBay's same-store sales growth accelerated in the month and came in at 17.8%, up from 15% in February and 12.7% in January. Its legacy auction business continues to face pressure, but eBay's fixed price business advanced more than 20% during the period. ChannelAdvisor noted that this was eBay's strongest month since March of last year.
The ChannelAdvisor data is yet another solid data point for eBay. The company's fundamentals remain strong, and Icahn's involvement should lead to relative price outperformance even in a difficult market environment. We think an announcement by eBay regarding a potential IPO of PayPal is forthcoming, though the timing remains uncertain. If not, we would expect Icahn to increase his stake and become even more aggressive. Under either scenario, eBay's shares should perform well. We think eBay is worth nearly $80 per share at the time of this writing. Like all of our best ideas, eBay is included in the Best Ideas portfolio.
Disclosure: Some of the firms mentioned in this article are included in the portfolio newsletter products of Valuentum. 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.