EBay's PayPal Goes Mobile -- Analyst Responds (EBAY)

Stifel Nicolaus analyst Scott Devitt on eBay Inc. (EBAY) and its launch of PayPal Mobile:

• In the next several weeks, PayPal will launch a service for consumers to make purchases or money transfer using text messaging via mobile phones. We believe this to be the first step in a long-term effort by PayPal to become a more relevant payment system in the traditional retail world. We note, however, that the initial rollout of PayPal Mobile is geared more directly toward peer-to-peer offline payments. PayPal already offers PayPal Buyer Credit, which is funded by GE Capital.

• PayPal Mobile will initially launch in the United States, Canada, and Britain. Over time, the company is interested in extending the service to more than 55 countries and regions where PayPal is registered to transfer funds online.

• PayPal Mobile will offer customers two options for transferring funds, via text message or by calling an automated customer service system and using voice commands to transmit funds. For the text service, cell phone users will be able to send a text message to 729725 (the spelling of PayPal on a numeric handset keypad) with the amount of money to be transferred and the recipient's phone number. A PayPal computer then calls back the sender and requests a PIN to confirm the transaction. PayPal then notifies the recipient and tells it how to claim the payment online.

• PayPal has 96 million global user accounts, compared to American Express with 66 million, Discover with 50 million, Bank of America with 33 million, and Wells Fargo with 23 million. PayPal generated $28 billion in payment volume in 2005 with merchant services accounting for 30% of total TPV. Interestingly, PayPal's $28 billion in payment volume in 2005 compares to Google's PayPal-killer, GPay, which generated $0 in payment volume in 2005.

• Separately, Bill Cobb – President eBay North America, presented at the Stifel Nicolaus consumer conference on March 14, 2006. Our greatest takeaway from the presentation was that it, as well as every other public executive presentation given by eBay management since the fourth quarter 2005 results, exuded a level of confidence that leads us to believe business is going quite well at eBay despite the recent share pullback.

• At current levels, we recommend aggressive purchase of eBay shares for three reasons – (1) the quarter is trending fine and full-year expectations appear to be too low; (2) eBay Express is coming and will be relevant in the 2006 holiday season; and (3) assets such as PayPal (and Skype) appear to be underappreciated by the market. In our view, eBay and PayPal represent dominant global franchises, well protected from competitive threats, trading at more than 35% below peak valuation. The auction business is to eBay what the operating system was (and is) to Microsoft and PayPal is to eBay what Office was (and is) to Microsoft; a natural monopoly. We reiterate our Buy rating and $48 target price on eBay shares, or 38x our 2007 cash EPS estimate.