After being under fire from activist investor Carl Icahn, eBay Inc (NASDAQ:EBAY) announced plans in September 2014 to spin off Paypal Holdings Inc (NASDAQ:PYPL); the digital payments company it acquired more than a decade ago for $1.2 billion. On July 20, Icahn’s dream became a reality as Paypal marked its first official day trading as a public company. The spinoff has been causing a stir on Wall Street as investors are viewing Paypal as a new growth option, while eBay’s expansion decelerates amid increasing competition in e-commerce.
PayPal started trading on July 20 with a market capitalization of roughly $46.6 billion, while eBay shrunk to about $34 billion. PayPal’s initial offering was priced at $38 per share and jumped approximately 5% to $40.47 in the same day, while eBay closed at $28.57.
SunTrust analyst Robert Peck weighed in on both companies on July 20 in light of the spinoff.
Peck was bullish on PayPal right off the bat, initiating a Buy rating on the stock with a $45 price target, citing that the company is a leader in a “large, growing [total addressable market]” and has more than enough “capital capacity” to fund growth.
Peck comments, “[Paypal] is a leading enabler of online and in-app payments, thus levered to secular growth of electronic payments and e-commerce (16% CAGR), including mobile (28% CAGR).”
The analyst continues, “Per management, inorganic growth is core to the growth strategy and key areas of focus include: in-store (acquisition of a global processor could make a lot of sense), P2P payments, P2P lending, SMB lending, and loyalty/rewards. The company has a strong recent track record of M&A.”
Assuring investors that Paypal can support its growth plan, the analyst adds that the company has more than $6 billion in cash on hand already and the ability to raise about $5 billion in debt.
On the other hand, Robert Peck has less optimistic view on eBay, maintaining a Hold rating on the stock with a $30 price target. He notes that eBay is in the midst of taking its first steps to turn around a period of poor financial performance.
While the analyst sees a variety of positives for eBay’s long-term growth, such as the “beginning [of] some transformation initiatives, especially structured data which are key to reaccelerating growth and user engagement,” he believes that near term growth will be limited “until the multi-year transformation begins to deliver.” Peck concludes that although eBay has a limit on the number of shares it can repurchase over the next couple of years, “it can thereafter lever up to aggressively return capital, which could deliver outsized returns.”
When measured over a one-year horizon and no benchmark, Robert Peck has an overall success rate of 64% recommending stocks, earning a +13.6% average return per recommendation.