PayPal Gets Lift From Billing Service

NEW YORK (Trefis) --eBay (EBAY) recently announced its fourth-quarter earnings, which indicated margin improvement driven by the Bill Me Later (BML) service of Paypal.

A few reasons cited for the margins increase include a decline in charge-off rate, lower credit losses and higher payment volume. eBay's PayPal service competes with Google ( GOOG) Checkout and credit card companies like American Express ( AXP), Visa ( V) and MasterCard ( MA).

PayPal's BML is a service that lets consumers delay payment on online purchases. The service has gained rapid adoption recently and has benefited from reduced credit availability for consumers through traditional sources like bank credit cards.

We estimate that Paypal constitutes around 21% of the $32.81 Trefis price estimate for eBay's stock, which is about 7% above market price.

Paypal's BML service has become popular as it provides users flexibility in making payments. This service is particularly attractive for consumers who can't use credit cards because they either don't have them or have maxed out their credit limits.

BML was acquired by eBay in October 2008 at a valuation of around $945 million and then later merged with Paypal to complement its service.

According to eBay, BML's charge-off rate (the credit loss rate) has declined from 11.1% in the fourth quarter of 2009 to 6.1% in the fourth quarter of 2010 due to improved quality of the portfolio and improved collection methodology. The recessionary period in 2008 and 2009 led to payment defaults for BML, and also caused trouble for credit card companies.

Another factor that sparked margin expansion was higher payment volume. The total payment volume (TPV) on BML increased by 49% in Q4 2010 over the same period last year.

During 2010, Paypal's EBITDA saw sharp improvement, from 9.1% in 2009 to 19.1% in 2010. We expect the favorable economic environment to continue to push margins upward to around 24% by the end of Trefis forecast period.

If Paypal's BML service continues to show improvement, Paypal's margins could increase at a faster rate than suggested by our base forecast. There could be an upside of 5% to our estimate for eBay stock if Paypal's margins increases to peak levels of 28.5% (achieved in 2005) by the end of our forecast period.

Drag the trend line in the modifiable chart above to see how various Paypal EBITDA margin scenarios could affect eBay's stock value.

See our full valuation analysis for eBay here .

Like our charts? Embed them in your own posts using the Trefis Wordpress Plugin.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

More from Opinion

12 Stocks That Our Writers and Their Sources Recommend You Buy Here

12 Stocks That Our Writers and Their Sources Recommend You Buy Here

Musk Goes on Unoriginal Media Tirade

Musk Goes on Unoriginal Media Tirade

What's Happening in Video Games This Week: On the Road to E3

What's Happening in Video Games This Week: On the Road to E3

Wednesday Wrap-Up: Let's Talk About General Electric

Wednesday Wrap-Up: Let's Talk About General Electric

From Finance to Fast Food: Women are Dominating this Week

From Finance to Fast Food: Women are Dominating this Week