The bullish case for eBay Inc EBAY is mostly based on its shift towards its own payment system as it pulls away from Paypal Holdings Inc PYPL this year towards a full break-up by mid 2020, according to Morgan Stanley.
The Analyst
Morgan Stanley's Brian Nowak upgraded eBay from Underweight to Overweight with a price target lifted from $36 to $58 while naming the stock a top large cap pick.
The Thesis
EBay said in early 2018 it will start moving a small percentage of its payments volume to its new partner Adyen this year after cutting ties with PayPal. Nowak said the move should be seen by investors favorably as it could result in higher user conversion and spend given a more integrated and comprehensive payment offerings. Investors should be more confident in eBay's ability to grow its user base, which would result in higher gross merchandise value metrics over time.
Under a new payment partner, Nowak said eBay should be able to collect a greater share of the profit and simultaneously pass on selling payment fees that were previously paid to PayPal. The analyst's in-depth payments model suggests the payments business could reach $2.6 billion in revenue by 2021 and generate 20 percent of the company's total EBIT, or $750 million. This figure is 50 percent above the $500 million figure some analysts are modeling.
Bottom line, a better than previously modeled outlook for the payments business should result in eBay's long-term free cash flow rising 60 percent and now supports a bullish stance on the stock.
Price Action
Shares of eBay were trading higher by more than 5.5 percent at $43 early Wednesday morning.
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