) 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. eBay's PayPal service competes
with Google (
) Checkout and credit card companies like
), Visa (
) and MasterCard (
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.
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
According to eBay, BML's charge-off rate (the credit loss rate)
has declined from 11.1% in Q4 2009 to 6.1% in Q4 2010 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.
During 2010, Paypal's EBITDA saw sharp improvement - from 9.1%
in 2009 to 19.1% in 2010. 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