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Stock Analyst Update

A Smart Move for eBay

The transition into payments could enhance the network effect behind our narrow moat rating on the firm and improve consolidated take rates.

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In a quarter where solid holiday gross merchandise volume, or GMV, growth (up 10%, or 7% on a currency-neutral basis) should have been the headline,  eBay's (EBAY) decision to branch out into payment intermediation stole the show. EBay will partner with Netherlands-based Adyen to simplify the end-to-end payment process on its Marketplace platform, with primary goals of lower costs for sellers (charging a single fee for marketplace and payment services) while offering buyers a streamlined process across a wider range of payment options. The transition is expected to be a "multi-year journey," as eBay's operating agreement with PayPal (which will remain a payment option for buyers at checkout) allows eBay to process 5% of its GMV in 2018 and 10% in 2019 before transitioning most of its ecosystem when the agreement expires in 2020.

With structured data/AI, promoted listing first-party advertising, and guaranteed delivery making eBay a more competitive platform, we believe a move into payments could enhance the network effect behind our narrow moat rating. In other words, we expect consolidated take rates to improve from mid-8% in 2017 to the low double digits because of this transition. We're intrigued as to whether this and other marketplace enhancements like voice/image search, VR/AR functionality, and simplified returns can make eBay a more attractive for vendors looking to diversify beyond Amazon, which could narrow the gap between eBay's GMV trajectory and global e-commerce growth trends in the midteens.

Based on its current Marketplace momentum and payment plans, we're planning to raise our 10-year revenue growth assumptions from the mid- to the high single digits. While there are still payment processing details to sort out, we anticipate at least a 10% increase to our $36 fair value estimate. While this implies shares are fairly valued, we believe eBay's transformation and capital-allocation stories should be on investors' radar screens for potential pullbacks.

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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.