A Study in Overreaction

We often refer to the “wisdom of the market,” investing the stock market with powers of insight almost amounting to clairvoyance. The market does, after all, efficiently compile the sentiments of entire regiments of investors into one tidy number, the stock price.

We reflected on this collective wisdom last month in the wake of the news that eBay Inc. intends in due course to bring on an enterprising Dutch processor called Adyen to run a back-end payments gateway while eBay takes over front-end payments management.

Of course, the news left a big question mark hanging over PayPal Holdings Inc., which eBay owned for 13 years, until 2015. When the two parted company, they signed a five-year deal for PayPal to go on processing for eBay’s sprawling marketplace until July 2020. For its part, eBay said by 2021 it will have moved most of its merchants to the new eBay-Adyen platform, with eBay standing in as the merchant of record in place of PayPal.

Investors made it plain what they thought of that proposition. They torpedoed PayPal’s stock, which sank $8 virtually overnight, or around 10% of its pre-announcement value. Even by the time of this writing in mid-February, the stock was still down by about $7. As Larry Berlin, who follows PayPal at Chicago-based First Analysis Securities Corp., told us at the time: “Investors assumed the eBay deal [with PayPal] was everlasting.”

Now, is this collective wisdom—or collective panic? After all, PayPal had just announced a solid quarter. And eBay is commanding less and less of its business—13% of dollar volume last year, down from 19% in 2015. By July 2020, that share will have shriveled to 4%, according to projections by PayPal’s management.

Plus, the expiration of the operating agreement will free up PayPal to seek processing deals with other marketplaces all over the world. It’s not throwing out any names—way too early for that—but you can bet it’s starting talks with a number of them now.

None of this is to suggest eBay has gone off-course. It clearly—and, in our view, correctly—sees opportunity in seizing a bigger role in handling payments for its sellers. And to that end it has already stocked up on talent, including: Alyssa Cutright, a former Square Inc. and PayPal executive, as vice president of payments; Jingming Li, formerly with Ant Financial, as vice president of the payments platform; and Yvette Bohanan, formerly with Alphabet Inc.’s Google unit, as vice president of risk management.

What we are suggesting is that, perhaps, investors should take a deep breath when they look at this development. Both parties stand to benefit.

—John Stewart, Editor, john@digitaltransactions.net