Elliot Turner presented his in-depth investment thesis on eBay (Nasdaq:EBAY) and PayPal (Nasdaq:PYPL) at Wide-Moat Investing Summit 2015.
eBay is a simple sum-of-the-parts situation, with a catalyst—the upcoming spin (slated for early July). EBAY Marketplaces and PayPal have their own unique moats, and both are deeply misunderstood for a variety of reasons. The implied market values were recently around 7.5x for Marketplaces and 12.5x for PayPal. Marketplaces is an outstanding, under-appreciated business. It has operating margins north of 30% and throws off over $2b of FCF. The company has faced challenges in the past few years, seeing it’s growth rate slow from double digits down to the low to mid-single digits. Meanwhile its shares are priced for negative growth. As for what makes the moat: marketplaces benefits from a tremendous network effect, with a global emphasis where buyers and sellers can meet and reliably trust that they will get the receiving end of their bargain, all the while Marketplaces itself takes no inventory risk. In short, it is a capital lean model with long-term staying power.
PayPal is where most of the investor attention is focused, yet still, people underrate the business. While everyone is worried about Apple Pay as a competitor, they miss that a) Apple Pay is simply a layer and b) PayPal has some extremely strong traits that are strengthening. The company has ~$10.5 billion of float that the market for now ignores, as the company accounts for it both as an asset and liability, thus overstating total assets and confusing investors. No one talks about float at all, though recently the company hinted that OPM will give it a big cost of capital advantage (there is more depth behind this I am excited to speak about). It has similarities to a bank deposit base or an insurance float, though considerable differences from each. On the revenue growth side, there are 3 levers the company can pull: user growth, charges per user, dollars charged per transaction. Each is moving in the right direction, creating a compounding effect, while there is one drag: take rate. There is considerable concern about the take rate in the analyst community, though I believe this is misguided. Despite the take rate atrophy, the company is still growing at 15-19% annualized on the top line, with SG&A leverage. What people really miss is that take rate will only atrophy at its present pace if and only if payment volume growth continues. This is so because the merchants for whom PayPal is giving the big discounts are the big retailers who only recently became a focal point of management. In short: there are several sources of a moat here: network, regulatory & float.
About the instructor:
Elliot Turner is a managing director at RGA Investment Advisors, LLC. Prior to joining RGA, Elliot was a principal and managing director at AustinWeston Asset Management LLC, a value-driven investment management firm, where he specialized in discovering and analyzing long-term investment opportunities and strategic portfolio management. Elliot holds a Juris Doctor from Brooklyn Law School, and is admitted to practice law in New York State. He also holds a Bachelor of Arts degree from Emory University where he double majored in Political Science and Philosophy.
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