Credit Card and Paypal

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North America Equity Research
26 June 2009

eBay, Inc
An in-depth look at PayPal's Business
With eBay focusing on PayPal as the primary engine of its growth, we take a deeper look at the value of the Payments unit, and its growth opportunities over the coming years. We continue to believe the upper range of the company’s outlook for $4B-$5B in F’11 revenues could be difficult to reach, but think $4B could be achievable. At a 20x multiple to our F’11E segment Net Income, the PayPal business would be worth $9B. • Off-eBay growth will be key. We estimate that, by 2011, eCommerce and online travel will combine to be over $1 trillion worldwide, up from $770B in 2008. By our estimates, PayPal accounted for ~4.2% of the off-eBay volume of combined eCommerce and travel last year. We believe the number would need to rise to more than 6.0% in F’11 in order for the company to meet the low end of its F’11 revenue target. • Increasing on-eBay penetration remains a driver. The maturation of PayPal in international markets can be a key catalyst for increasing penetration, as the low-hanging fruit on the domestic site has largely been picked. Further, expanding credit offerings to make PayPal a viable option for higher-ticket items can help offset sluggish GMV growth. • BillMeLater should improve longer-term funding mix. Segment margins in the two quarters since the BML acquisition have been down 500 bps Y/Y. However, because BML is funded through ACH, we think it can improve PayPal’s funding mix, and eventually drive better margins. • Brand is a valuable asset. Alone among online-only players, PayPal has established a payment brand to compete with incumbent players such as Visa and MasterCard. We believe PayPal can continue to push penetration as an alternative payment platform; alternatively, PayPal could try to expand its footprint in the payments ecosystem and become a merchant acquirer, focusing especially on smaller and mid-size merchants. eBay, Inc. (EBAY;EBAY US) 2008A EPS Reported ($) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY 0.34 0.35 0.38 0.29 1.36 2009E 0.28A 0.27A 0.27A 0.32A 1.13A 2010E (Old)

EBAY, EBAY US Price: $17.14 Price Target: $15.00

Internet Imran Khan

(1-212) 622-6693

Lev Polinsky, CFA
(1-212) 622-8343

Bridget Weishaar
(1-212) 622-5032

Vasily Karasyov
(1-212) 622-5401

Computer Services and IT Consulting Tien-tsin Huang, CFA

(1-212) 622-6632

Reginald L. Smith, CFA
(1-212) 622-6743 J.P. Morgan Securities Inc. Price Performance
30 25 $ 20 15 10
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09

YTD Abs 20.1%

1m -3.5%

3m 32.8%

12m -40.1%


0.28 0.28 0.29 0.31 1.17

0.29 0.29 0.30 0.32 1.20

Source: Company data, Reuters, J.P. Morgan estimates. Note: F'08, F'09 and F'10 estimates include adjustments for FAS123R. Excluding FAS123R, our F'08, F'09 and F'10 EPS estimates are $1.71 $1.53 and $1.63.

Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date

17.14 25 Jun 09 29.13 - 9.91 22,004.50 Dec 1,284 15.00 31 Dec 09

See page 30 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at or can call 1-800-477-0406...
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