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Uncertainty on long-term implications hangs over PayPal, eBay updated agreement

Analysts are divided on whether eBay Inc.'s contract with a European payments partner poses a long-term threat to PayPal Holdings Inc.'s market share.

PayPal separated from eBay in July 2015 but had maintained an operating agreement whereby eBay's online marketplace uses PayPal to process payments. EBay will now use Netherlands-based Adyen BV as its primary partner for processing payments, rather than renewing with PayPal. Instead, the two companies have signed an agreement to make the PayPal technology available on eBay through July 2023.

PayPal's stock tumbled nearly 6% in morning trading Feb. 1, after the companies announced the updated agreement on their earnings calls. Credit Suisse analyst Paul Condra called the news a "relatively unexpected outcome" in a Feb. 1 note. Although the market reacted negatively, Condra said PayPal has "always anticipated" ending its agreement with eBay. Looking ahead, he expects "little, if any" incremental EPS headwind.

Guggenheim analyst Jeffrey Cantwell called the near-term share price reaction "overdone" but acknowledged that the eBay-Adyen agreement could pose a long-term threat to PayPal. He said Adyen has a pricing advantage over PayPal and expects that the Netherlands company will evolve into a "serious" long-term competitor.

But Wedbush analyst Moshe Katri believes PayPal's management team made a strategic decision to gradually separate from eBay that will not significantly impact the company's growth or profitability.

"This was a very good decision on behalf of PayPal's management to de-risk its exposure to a large merchant that was looking for fee concessions," Katri said in an interview, adding that PayPal has built in a "cushion" for a natural separation from its legacy business with eBay. On the flip side, eBay will intermediate payments on its marketplace and directly manage transactions.

"It seems like both parties are getting what they wanted," Katri said.

Katri dismissed concerns over an increase in the competitive landscape. Instead, he thinks the wind-down removes the overhang of catering to a large national merchant like eBay. There is not as much growth in the national merchant business, and it is subject to fee compression, he said.

The merchant processors that are faring well, like Global Payments Inc. and Total System Services Inc., are primarily focused on small businesses, which are more profitable, Katri said. And while Adyen might develop as a competitor in the national merchant business, Katri said that would make it a threat to a company like First Data Corp., as opposed to PayPal.

"I don't see any long-term impact [to PayPal] here," he said.

Katri said the noise surrounding the eBay agreement overshadowed what he considered to be very strong fourth-quarter 2017 results. PayPal's stock was down more than 8% to $78.40 at the closing bell Feb. 1.