As shareholders prepare for a major investor day at Ebay's HQ Thursday (March 28), many are now worrying about PayPal's in-store payments move. Although such a move has the potential to exponentially increase PayPal's market size, the more likely near-term risk is a drop in profit margins.
"Profitability of on-site payment will be dramatically lower than it is online," Bill Smead, of Smead Capital Management, told Reuters. Smead is an eBay shareholder who has been bullish on the company for several years. Smead's Seattle-based firm has trimmed its eBay position twice in the past year. "If it's going to be a lot less profitable, PayPal may not expand there as much as previously thought," he added. "I would look for eBay to address this at the investor day."
The much more pressing issue, though, is whether PayPal will meaningfully — and, hopefully, permanently — be able to get consumers to use the payments in-store. All of the data-gathering and other secondary benefits assume that shoppers will embrace these payment methods. Thus far, consumers have shown impressively little interest in doing so.
For the year, eBay's stock is up 0.6 percent, lagging the Nasdaq Composite Index's gain of 7.2 percent this year. Concern about lower profitability at PayPal has weighed on eBay's stock, said the Reuters piece.
"Margin expansion may take a back seat to growth," Colin Sebastian, an analyst at R.W. Baird, wrote in a note previewing eBay's investor day.
And Richard Sichel, chief investment officer of Philadelphia Trust Co., said: "Any time you take a successful business and move it to other arenas, there's great opportunity and risk. There's lots of competition out there, and it's too early to know what PayPal margins will settle down to be."
If other payment networks follow MasterCard and impose a digital wallet fee on PayPal, that could shave 2 cents a share off eBay's earnings each year, Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods, estimated recently. Even without pressure from MasterCard and Visa, PayPal's Point-of-Sale, or POS, business, as it is known, will be less profitable than its online business, according to analysts. PayPal has signed up several large retailers, including Home Depot, Toys "R" Us and JC Penney, to accept PayPal in their stores. However, PayPal is taking a smaller cut of sales to persuade these retailers to test the service. PayPal's POS business is only 30 percent as profitable as its online business, Brian Nowak, an analyst at Nomura, estimated in a note previewing eBay's investor day.
- check out the Reuters story