eBay (EBAY) Has A New Squeeze and PayPal (PYPL) Gets the Boot

February 1, 2018 11:51 AM EST
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Relationships don’t always end well. This goes for people, and as PayPal (Nasdaq: PYPL) investors are learning, businesses.

PayPal’s stock tumbled Thursday after eBay (Nasdaq: EBAY) said it will replace PayPal as its primary payments processor in 2020, ending a 15-year partnership that began when PayPal was acquired by eBay in 2003. The two companies separated in 2014 with the spinoff of PayPal into an independent, public company, but operating agreements were maintained up to this point.

Unexpectedly, on Wednesday night eBay said it entered an agreement with a little-known Amsterdam based company, Adyen, to be its long-term payment processing partner, sending shares of PayPal lower by 8.5 percent.

“[eBay] ultimately viewed PayPal as limiting their ability to create ‘more seamless experiences’,” said Mizuho analyst Thomas McCrohan.

Discussing impact on the stock, McCrohan said, “Bulls will point to terms of the existing operating agreement restricting eBay from cutting ties with PayPal until July 2020, and speculate PayPal’s capacity to acquire could mitigate the lost earnings. Bears will counter Adyen was the asset bulls wanted PayPal to acquire, and will note the damage losing eBay will have on PayPal’s fundamentals, and possibly internal morale.”

Baird analyst Colin Sebastian thinks the financial impact on PayPal will be limited.

“While eBay is making a strategic decision to gain more control over its marketplace payments, we assume PayPal will continue past 2020 to fund the majority of transactions,” said Sebastian.

The analyst added, “…we believe that a significant portion of volume on eBay (>50%) will likely continue to be funded through PayPal. In part this is due to existing seller relationships and integration with PayPal, and also consumer preferences for using PayPal on eBay.”

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