Today Is Our Last Chance to Capture All of PayPal's Upside

Editor's Note: Normally you'd have to be a paid-up member of Private Briefing to get this special intelligence from Bill Patalon. But we're sharing this with you for free because today is a critical day in the greatly anticipated PayPal spinoff. Now there are only hours left to become a "shareholder of record" in eBay in order to claim 1:1 shares in PayPal when it begins trading. This is one of the biggest stories - and opportunities - of the year, and Bill doesn't want anyone to miss out.

In June 2012, in the Private Briefing report "Two Years From Now, You'll Wish You'd Bought This Stock," resident tech expert Michael Robinson recommended eBay Inc. (Nasdaq: EBAY) as a profit play that was poised for a nice run.

Michael was right on the money.

eBay shares have zoomed more than 50% since then.

As it's turned out, however, this is one of those rare stock stories that's become better as time has passed.

And a plan to break into two companies - with the spinoff of eBay's PayPal digital payments unit - prompted me to re-recommend the stock in early October. (Since then, the stock has surged about 11.4% - versus only 6.3% for the Standard & Poor's 500 Index.)

eBay is moving ahead with the spinoff plan. And there are some brand-new developments - additional catalysts that can ignite torrid growth in PayPal's share price.

It's time for us to look at this stock anew.

And that's just what we're going to do for you today.

Breaking Up and Paying Off

We've been talking about the actual PayPal spinoff for months now.

But the details are finally coming together.

According to insights released yesterday, PayPal will become a public company on July 17 when it is spun off from eBay - and will begin trading on the Nasdaq under the ticker "PYPL."

But today is even more significant. According to published reports, that's when current eBay "shareholders of record" will receive one share of PayPal common stock for every share of eBay they already own.

That makes this afternoon a kind of "trade deadline" to get PayPal shares via the spinoff.

Indeed, the San Jose, Calif.-based company is already trading on a "when issued" basis under the Nasdaq ticker PYPLV.

We like this deal - in large part because, as you folks know, we really love corporate spinoffs.

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These transactions, where one company wins its freedom from its parent, are the Corporate America version of the Declaration of Independence.

But these "Declarations" benefit both parties.

Freed from the need to "conform" to a common corporate mission, the two newly independent firms are able to pursue independent, profit-maximizing growth strategies that also deliver peak shareholder value.

That's why spinoff stocks - as a group - tend to deliver market-crushing returns for years and years after the breakups occur.

In fact, as we told you a year ago in a free special research report on spinoff profit plays, a number of institutional and academic research studies show that spinoff stocks trounce general market averages for as long as three years after the transaction. For instance, Lehman Bros. research found that spinoff companies beat the market by 40% in the first two years, while a Penn State University study found these stocks generated an average three-year return of 76% - enough to beat the market by 31%.

Spinoffs aren't "free money." But in the stock market, they're about as close as you're going to get.

But here's the coup de grâce: Because they are so focused, so effective and so profitable, many spinoff companies are ultimately taken over at hefty premiums to their market price.

In this "New Age of Digital Payments," we could easily envision a big player snapping up PayPal - one of the rare "turnkey" heavyweights in a brand-new business.

As Carlos Kirjner, an analyst at Bernstein, said in a brand-new research report, "PayPal is to payments what Inc. (Nasdaq: AMZN) is to retail or Netflix Inc. (Nasdaq: NFLX) is to entertainment."

So there's a concrete business allure here.

But even if PayPal doesn't end up as a buyout target, you can count on the stock to deliver market-beating gains for the next several years.

Profit Play Intelligence Report: 3 More Market Beating Spinoffs Are Coming Fast. Details Here.

To see why, let's look at a deal the company cinched just last week. And we'll see how that acquisition fits into a larger - and highly aggressive - growth strategy PayPal has already embarked upon.

A "New Deal" for PayPal

Late last week, eBay said PayPal would acquire digital money transfer pioneer Xoom Corp. (Nasdaq: XOOM) for $890 million in cash. The $25-a-share purchase price represents a 32% premium over the San Francisco-based Xoom's average price over the past three months.

And it creates a heck of a strong union.

PayPal was founded in 1998, went public in 2002 and not long after was nabbed by eBay for $1.5 billion. Xoom was launched in 2001 as an early player in digital money transfers. The company's technology makes it possible for consumers to send money from the United States to 37 other countries.

In the market for digital payments - where companies like Apple Inc. (Nasdaq: AAPL) and Google Inc. (Nasdaq: GOOGL) - are just really getting started, PayPal is already a strong player. In its most recent quarter, PayPal delivered $2.11 billion in revenue - exceeding parent company eBay's "marketplace" (auctions and the like) revenue for the first time ever.

Thanks to its head start, PayPal has a hefty beachhead in digital payments, with more than 165 million active customer accounts. Last year, in fact, PayPal processed more than $235 billion in payment volume and handled a billion mobile transactions across 10 million global merchants.

But as an independent venture, PayPal becomes even more alluring, says Doug Anmuth, an analyst at JPMorgan Chase & Co. (NYSE: JPM).

"As a standalone company, PayPal immediately becomes one of the more exciting stories in [the] payment-processing" market, the analyst said.

Here's why. If you look at PayPal on its own, Anmuth says you have:

Organic revenue growth in the mid-teens, meaning PayPal is growing its top line at a pace that's 40% faster than the rivaling companies that Anmuth says he's following.

A high relative exposure to digital commerce, one of the fastest-growing areas in digital payments

And a muscular strategic value based on strong brand recognition and a global reach courtesy of its pool of more than 160 million users.

Anmuth says he's bullish on PayPal in the "short run" - which he defines as the next two years. However, he acknowledges that the digital-payments landscape is evolving. And that means - more than any other company that he follows in this market - the longer term profit potential for PayPal will depend on the strategic plans the company's management makes... and then how well it pulls off those plans.

With PayPal, those "strategic plans" start with the Xoom buyout.

And that deal is a crucial one - which dovetails perfectly with a global "manifest destiny" in digital payments that the soon-to-be-declared-independent PayPal is already pursuing.

According to PayPal CEO Dan Schulman, "expanding into international money transfer and remittances aligns with our strategic vision to democratize the movement and management of money. Acquiring Xoom allows PayPal to offer a broader range of services to our global customer base, increase customer engagement and enter an important and growing adjacent marketplace."

Buying Xoom fits into PayPal's plan to expand into important markets like China, India, Brazil and Mexico. The meshing of Xoom and PayPal has the potential to be a true "killer combination," Michael Robinson told me.

Our in-house tech guru, Michael runs the Radical Technology Profits and Nova-X Report advisory services. And he's a guy I really like talking with because of his global view of technology profit opportunities.

"Bill, as you know, I've been watching Xoom for some time," he said Monday. "With its focus on digital money transfers, Xoom says it is targeting a market that no less an authority than the World Bank says is worth $102 billion. Xoom right now has 6.8% of that available global market. So that tells us there's plenty of room for Xoom to grow. Meshing these two companies creates quite the growth vehicle."

That's not hyperbole. Unlike bigger and better-known rivals such as Western Union Co. (NYSE: WU) and MoneyGram International Inc. (Nasdaq: MGI), Xoom only transfers money one way - outbound from the U.S. market.

But the potential for cross-selling products - and for creating new ones - clearly makes possible it possible for the PayPal/Xoom entrant to pull off a hefty market-share grab.

In fact, when the deal was first announced, Western Union's shares took an immediate pummeling, plunging 6.9% to $18.99. And they haven't recovered.

Don't expect them to, says Sara Gubins, an analyst at Bank of America Merrill Lynch.

"In our view, Xoom under PayPal poses a greater risk to Western Union and MoneyGram in the digital-remittance market, given increased resources and significantly better global brand recognition," she wrote in a research note.

While the digital-remittance market is a small source of revenue at both Western Union and MoneyGram, it is the fastest-growing business segment for each.

"In 2014, Western Union grew its digital transactions 39% year-over-year, versus 5% growth on a consolidated basis," Gubins wrote. "MoneyGram grew digital 34% year-over-year versus 2% growth on a consolidated basis."

And PayPal is only going to add muscle.

Freed from eBay by the "Declaration of Independence" spinoff. PayPal will be free to pursue other deals like Xoom.

In fact, on Sunday, in a candid interview with Financial Times, Schulman, the PayPal CEO, confided that acquisitions were already part of his growth strategy.

"The balance sheet affords us the opportunity to look opportunistically where it makes sense to acquire," Schulman told his interviewer. "I think there is a tremendous opportunity to look across the world."

By acquiring other small firms, PayPal will add market share in existing businesses and get access to wholly new business and geographic markets. During its fourth-quarter conference call with analysts and investors, eBay said it was giving PayPal $5 billion in cash - money the spinoff venture could use for dealmaking.

As Wedbush Analyst Gil Luria said in an interview with TheStreet, "there's a lot of innovation around financial technology and payments, and PayPal is really the biggest company focused on technology in payments, so it makes them the preeminent buyer of innovative payments companies. The market wants PayPal to be the dominant player in payments, so the Xoom acquisition was favorably received. It's not surprising Mr. Schulman would choose to reveal that he's looking for future acquisitions."

Analysts have speculated that privately held online-payment firm Stripe - which this spring reportedly wanted a $5 billion valuation with new investments - could be a PayPal target. Payment security or alternative lending - the focus of PayPal Credit - are other business opportunities.

As we said, geographic expansion also makes sense.

"We see South Asia and South America as open for massive mobile-payment growth," Manhattan Venture Partners Chief Economist Max Wolff told The Street. "We expect PayPal to grow into mobile web and mobile point of sale transactions with acquisitions in Europe and spending on South America and South Asia."

A Wall Street "Haiku"

By allowing both eBay and PayPal to pursue laser-focused financial and marketing strategies, the breakup will clearly unlock value for each firm.

Bernstein's Kirjner says PayPal is using both the Web and mobile to "fundamentally change" how transactions occur. The "vast untapped potential" that remains gives the company - and its share price - a hefty upside... in both the near term and in the long run.

Kirjner believes PayPal's revenue will grow at a compound annual growth rate (CAGR) of at least 17% over the next three years, giving the firm record revenue of at least $10.8 billion by next year.

He says PayPal's cash flow (defined as "EBITDA") for 2016 could reach $3 billion. And he says fully diluted earnings could reach $1.56 a share.

At 25 times that result, Kirjner says PayPal should be valued at about $43 a share - or about 18% above its "when-issued" price of $36.71 Monday.

Longer term, expect more growth.

And don't forget eBay itself, which analysts keep referring to as the "marketplace" stock.

With spinoffs, there's often an interesting result following the breakup: Initially, the newly minted spinoff firm (often called "SpinCo" in Wall Street parlance) sinks in price. The reason: Many mutual funds, exchange-traded funds (ETFs) and index funds can't hold the stock because it somehow doesn't meet with their mandate or "charter."

That gives investors a bargain-basement buying opportunity because - as we've demonstrated - spinoff firms tend to out-zoom the market.

Longer term, the stock prices of both the parent and the "SpinCo" firm benefit.

Here, however, there's lots of speculation that PayPal could surge while eBay temporarily sells off.

Indeed, as BGC Financial Analyst Colin W. Gillis cleverly wrote:

"Haiku: When the split is done

expect PayPal to pop up

marketplace to sink.

But if that happens, you might be looking at a Contrarian Investing profit play being handed to you... on a haiku platter.

"Looking into 2016, depending on the degree of market fervor for PayPal, we may find that PayPal becomes valued as a high-growth company with the accompanying volatility in the share price," Gillis wrote. "Our view is that if marketplace (eBay) shares are materially sold off - which may happen - it may prove to be the more interesting asset in 2016. Marketplace has attractive cash flow characteristics, and may prove to be a target for private equity or a possible acquisition target for a mega-cap technology company.

While the marketplace business faces issues with its search-engine rankings and getting its user base to re-engage after the data breach, management should be driving solutions to these issues in early 2016. It should be a relatively simpler task for marketplace to accelerate growth given its anemic recent performance than PayPal - which has been showing strong recent performance."

Matt Nemer, an analyst at Wells Fargo & Co. (NYSE: WFC), made a similar case - and believes the opportunity will present itself even sooner.

"We believe the imminent spinoff of PayPal will create a unique value opportunity as many growth-oriented investors likely sell shares of the remaining parent company," Nemer wrote. "In our view, this sets up an interesting entry point as eBay operates an arguably better business model than most retailers (marketplace format with no inventory risk, better margins, greater capital efficiency) with low- to mid-single-digit revenue growth (and the potential for double-digit EPS growth driven by share buybacks), and the option for upside potential from numerous initiatives - including structured data, category merchandising, and an easier listing process, to name a few."

As a result of this, Nemer boosted his target price for eBay from an earlier range of $61 to $63 per share to a new range of $68 to $69 a share.

Target prices range from the mid-$60s to as high as $73 a share.

Editor's Note: Money Morning's Executive Editor Bill Patalon delivers intelligence briefings just like this one with instructions for making double-digit profits on the market's biggest developments and stock picks every day. You can now have all of his intelligence briefings delivered directly your inbox. Just click here to set it up.

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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