EBay (EBAY): Spinning Off PayPal

EBay (EBAY) can post pretty good results, and the market does not care. Yesterday, the online auction company put up an earnings increase of 26% on a revenue pop of 24% to almost $2.2 billion. EBay was a bit cautious about what would happen the rest of the year, but, in a recession, the numbers were awfully good.

Wall St. traders did nothing. EBay shares barely moved. The company trades at $32, down from a 52-week high of $40.73. Something is wrong. The EBay’s core auction business is not growing as fast as the company as a whole. Its revenue was up only 14% year-over-previous-year. The PayPal operations grew at 34%.

The fact of the matter is that, with a market cap of $42 billion, the value of PayPal is trapped inside the company. Its revenue run-rate is almost $2 billion a year and it grows at a rate nearly double that of the auction business.

EBay’s price to sales ratio is about 5.5x. For PayPal, the figure is probably closer to 10x because of its growth rate. That would put PayPal’s value at about $25 billion, and the auction business at less than $18 billion.

EBay investors have nothing to look forward to other than more modestly good quarters with auction revenue growth moderating and strong results from PayPal. The stock will stay between $30 and $35.

If Ebay were to spin-out PayPal, investors would at least have a reasonable chance for some strong return. The value of the stock in the auction business might never rise much, but PayPal could well outperform most e-commerce and internet stocks.

Douglas A. McIntyre