UPDATE: PayPal Justing Getting Warmed Up for eBay (EBAY); Nomura Ups to Buy

October 4, 2012 6:45 AM EDT Send to a Friend
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Price: $52.53 -0.57%

Rating Summary:
    30 Buy, 16 Hold, 0 Sell

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Today's Overall Ratings:
    Up: 43 | Down: 33 | New: 14
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(Updated - October 4, 2012 11:31 AM EDT)

Shares of eBay (NASDAQ: EBAY) are higher early Thursday after Nomura Securities upgraded the stock from Neutral to Buy while lifting its price target from $43.50 to $60, suggesting 23.5 percent upside.

Although PayPal has been the driver for the stock and has seen margins expand by ~400bp, "this is just the beginning of rising PayPal earnings power," analyst Brian Nowak comments.

Nowark said the recent de-levering in variable costs has been the a significant driver of the segment margin improvements, but it is not the end. "This 2Q:12 contribution margin expansion was the largest since 2009, and in our view, was an omen of what's to come…contribution margins are set to expand." The analyst said he see further evidence the company is "effectively managing transaction expense and credit card funding exposure, and benefiting from scale and
risk/management improvements and fraud savings."

In addition, a fresh look at the company's Bill Me Later (BML) features shows it is creating a a "triple-threat" of upward contribution margin pressure. "BML's
contribution margins are 1.3x higher than the core PayPal business, BML leads to payment form substitution away from high-cost funding options, and BML's higher average revenue take rate leads to more incremental revenue dollars to spread over PayPal's fixed cost base," the analyst notes.

Noward expects PayPal margin to expand by 373bp in total over the next 3 years and sees PayPal overall segment margins headed highs, reaching 29% in 2013 and 31% in 2014. With PayPal becoming 65% of eBay's overall profitability, it matters.

The firm raised 2013 revenue/EPS estimates from $16.273B/$2.96 to $16.424B/$3.00.

For an analyst ratings summary and ratings history on eBay click here. For more ratings news on eBay click here.

Shares of eBay last traded at $49.49, up 1.8 percent.




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