What Happens To eBay After The PayPal Spinoff?

In a report published Thursday, Morgan Stanley analyst Brian Nowak maintained an Equal-weight rating on

, while raising the price target from $52 to $68. The spinoff of PayPal is expected to be completed in 3Q. The analyst believes that Marketplaces is a cash-generative, high-margin, mature retailer and that the EBIT margin guidance of 31-25 percent for this segment is encouraging, given that it suggests "minimal incremental dollar investment, and it allows eBay's 80+ percent free cash flow conversion to flow through." The analyst also believes that eBay is facing challenges to its top-line, while expressing confidence that the company would be able to generate fress cash worth $2.2 billion in 2016, even if the constant currency revenue growth is at zero percent. At the same time, the situation is not expected to be so dire for eBay, due to expectations of significantly easier comps in 2H15 and 2016. "Our base case assumes $2.3bn in total share repurchases in 2H15 and '16.That said, we see eBay's strong cash flow, debt capacity and potential strategic asset sales (eBay Enterprise and MercadoLibre) creating ~$14bn of excess cash to potentially be used for further buybacks," Nowak stated. In addition, PayPal is expected to face strong tailwinds due to global eCommerce growth, especially cross-border, for the next few years, which is likely to drive TPV growth in the double digit range. "PayPal's ability to drive increased penetration outside the US could help accelerate this growth," the Morgan Stanley report said. On the other hand, mCommerce is also expected to growing, capturing market share from desktop-based commerce. Therefore, the analyst believes that PayPal needs to prioritize mobile, although increasing competition from the largest mobile platform could make it difficult for PayPal to establish its leadership in the mCommerce domain. "PayPal's valuation will likely benefit from being a pure-play. But we do not expect TPV to see a material tailwind as a direct result of the separation... Importantly, any new large merchant signings will come at materially lower take rates and hence will have limited impact on revenue growth," Nowak added.