Contrary to the wishes of billionaire investor Carl Icahn, eBay (ticker: EBAY) and PayPal are better together as one company, some analysts say. For weeks, Icahn Capital Management’s head has called on the e-commerce juggernaut to spin off the payment processor as a separate company. In a letter to eBay shareholders released Monday, Icahn stated that eBay CEO John Donahoe is incompetent and has conflicts of interest with eBay’s competitors. In addition, under Donahoe’s watch, PayPal will go the way of other tech has-beens, such as BlackBerry (ticker: BBRY).
Icahn nominated two of his employees for seats on eBay’s corporate board. But both were rejected Monday by the company, which told shareholders to vote against them at the next shareholder meeting. EBay advised shareholders to vote for Donahoe. Fourth-quarter SEC filings, the most recent available, show Icahn has no positions in eBay, but NDTV Gadgets reported Icahn owns a 2 percent stake in the company. As of the most recent reporting period, Icahn Capital Management holds only 18 stocks with a portfolio valued at $30.5 billion, according to GuruFocus.
Separating PayPal would be “destructive” to eBay’s value, R.J. Hottovy, an equity analyst at Morningstar, wrote in a client note Monday.
“Icahn’s accusations about potential conflicts of interest within the eBay board as misguided,” Hottovy wrote.” Having a board with expertise in emerging payment technologies allows the company to better monitor emergent competitive threats and helps management develop business strategies to keep its moat intact. The board’s expertise has also benefited management’s acquisition strategy in recent years, which has been accretive to shareholder returns.”
Icahn launched a website in October called Shareholders’ Square Table, where he posts long letters about why eBay and PayPal are not better off together as one company. Contrary to Carl Icahn’s claims, eBay board member Marc Andreessen contends the outspoken mogul is conjuring a controversy out of nothing.
Ebay’s stock price has climbed 6 percent year to date, trumping the S&P 500’s 2 percent gain. But it has severely lagged the stock market over the past year, rising just 10 percent while the S&P climbed 23 percent. EBay shares currently trade at low valuations compared with the industry average, which includes Amazon.com (ticker: AMZN) and Google (ticker: GOOG). It carries a price-to-earnings ratio of 27 versus 41 for the industry. Its price-to-book value is 3.2, considerably lower than the industry’s average of 5.
S&P Capital IQ rates eBay stock a “hold” with a $65 price target. S&P equity analyst Scott Kessler believes Icahn’s activism will support the share price as does its growing international market. Foreign markets accounted for 52 percent of sales in 2013.
“We see eBay as the leader in online auctions, a mainstream internet retail destination, a facilitator of large transactions involving cars, real estate,” Kessler wrote in an equity report March 8. “We are optimistic about its payments segment and mobile opportunities but have some concerns about the sustainability of growth in the marketplaces segment and the possibility of increasing state taxes on internet sales.”
Bank of America Merrill rates eBay stock a “buy” with a $64 target price while noting the following investment risks: “1) increasing competition for third-party sellers from Amazon and potential eCommerce market share losses; 2) PayPal share loss on mobile from increasing competition from Google, Amazon, MasterCard, Visa, Square, Groupon, etc.; 3) decelerating Marketplace growth and a lack of positive impact from Marketplace changes; 4) Asian competitive pressure on international gross merchandise volume, GMV; 5) currency risk; 6) macro-headwinds, especially in both Europe and the US; and 7) elevated expectations for offline PayPal. The stock has been subject to heavy volatility in the past based on GMV growth and market share trends, and this volatility could increase due to economic uncertainty.”
The number of visits per customer on eBay’s site climbed 5 percent year over year in February after falling 20 percent in January, Bank of America Merrill Lynch wrote in an industry report Monday citing comScore data. The number of unique visitors to the site fell 6 percent year over year in February after declining 11 percent in January. By contrast, the number of visits per customer for the online retail industry fell 6 percent in February while the number of unique visitors slipped 2 percent.
EBay has a mammoth cash stockpile of $13 billion and has increased its share buyback program by $5 billion to support its share price. Ebay has tentatively scheduled the next shareholders meeting on April 14. EBay investors will voice their opinion to go along with or be contrary to Carl Icahn’s wishes of separating eBay and PayPal by voting for his board nominees. Until then, Icahn better get together more evidence as to why they should be severed.
By Quynh Ho
Shareholders’ Square Table
Morningstar equity analyst (print report)
Bank of America Merrill Lynch (print report)
S&P Capital IQ (print report)