Bill Me Later Driving eBay’s Paypal Profit Margins

January 25th, 2011 by Trefis Team
-4.34%
Downside
51.06
Market
48.85
Trefis
EBAY: eBay logo
EBAY
eBay

eBay (NASDAQ:EBAY) recently announced its FY Q4 2010 earnings, in which it indicated margin improvement driven by the Bill Me Later (BML) service of Paypal. A few reasons cited for the margins increase include a decline in charge-off rate, lower credit losses and higher payment volume. [1] eBay’s PayPal service competes with Google (NASDAQ:GOOG) Checkout and credit card companies like American Express (NYSE:AXP), Visa (NYSE:V) and MasterCard (NYSE:MA).

PayPal’s BML is a service that lets consumers delay payment on online purchases. The service has gained rapid adoption recently and has benefited from reduced credit availability for consumers through traditional sources like bank credit cards.

We estimate that Paypal constitutes around 21% of the $32.81 Trefis price estimate for eBay’s stock, which is about 7% above market price.

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Paypal’s Margin Improvement Continues

Paypal’s BML service has become popular as it provides users flexibility in making payments. This service is particularly attractive for consumers who can’t use credit cards because they either don’t have them or have maxed out their credit limits.

BML was acquired by eBay in October 2008 at a valuation of around $945 million and then later merged with Paypal to complement its service. [2]

According to eBay, BML’s charge-off rate (the credit loss rate) has declined from 11.1% in Q4 2009 [3] to 6.1% in Q4 2010 [1] due to improved quality of the portfolio and improved collection methodology. The recessionary period prevailing during 2008 and 2009 led to payment defaults for BML, and also caused trouble for credit card companies.

Another factor that sparked margin expansion was higher payment volume. The total payment volume (TPV) on BML increased by 49% in Q4 2010 over the same period last year. [1]

[trefis_forecast ticker=”EBAY” driver=”0089″]

During 2010, Paypal’s EBITDA saw sharp improvement – from 9.1% in 2009 to 19.1% in 2010. [4] We expect the favorable economic environment to continue to push margins upward to around 24% by the end of Trefis forecast period.

If Paypal’s BML service continues to show improvement, Paypal’s margins could increase at a faster rate than suggested by our base forecast. There could be an upside of 5% to our estimate for eBay stock if Paypal’s margins increases to peak levels of 28.5% (achieved in 2005) by the end of our forecast period.

Drag the trend line in the  modifiable chart above to see how various Paypal EBITDA margin scenarios could affect eBay’s stock value.

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See our full valuation analysis for eBay here.

Notes:
  1. See SeekingAlpha: Q4 2010 eBay earnings conference call transcript, January 2011 [↩] [↩] [↩]
  2. See eBay’s press release, October 2008 [↩]
  3. See SeekingAlpha: Q4 2009 eBay earnings conference call transcript, January 2010 [↩]
  4. Estimated by allocating the company’s operating expenses and D&A to each division pro-rata based on revenues [↩]