Shares of PayPal are cruising higher Friday morning to a near double-digit gain on its latest earnings report. However, it is looking like PayPal's gain has helped damage its long-term partner eBay, as shares of the online auction platform are falling at nearly the same percentage.
"We are lowering our rating on eBay shares to "Hold" from "Buy" based on PayPal's earnings release disclosure of weak eBay third quarter gross merchandise volume trends," Stifel analyst Scott Devitt wrote Friday morning.
He also lowered his price target to $35 from $43, tempering expectations.
The damage comes from a study commissioned by PayPal CEO Dan Schulman that highlighted the level of dependence eBay has on PayPal.
"Consumers on average are 54% more willing to buy when a merchant accepts PayPal [on eBay]," Schulman explained. "That goes up when it's a cross-border transaction, when it's mobile, when it's unfamiliar brands."
He added that 59% of PayPal users have abandoned a transaction because PayPal wasn't a checkout option, warning of the harm eBay's transition away from PayPal might cause eBay merchants.
"We expect deteriorating gross merchandise revenue growth and a bumpy path to the other side of payments could make for a prolonged period of compressed valuation for eBay shares," Devitt warned.
To be sure, he said that the company might be able to transition and turn the move away from PayPal dependence into a positive, noting the potential increase available in the long term for revenue and operating profit growth away from dedicated payments.
"There is significant asset value in eBay long-term given the strategic value of the core commerce platform plus its StubHub / Classifieds segments and the statistically low valuation the shares carry," Devitt explained. "But we think the negative fundamental story may play out for some time before an investor is paid for asset value."
As such, it might be better to look elsewhere for e-commerce plays as our own Jim Cramer cautions that eBay looks like a company "that does not know what it is doing."
(PayPal is a holding in Jim Cramer's Action Alerts PLUS.)