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eBay Shares Surge as Paypal Escapes Regulation

By Brett Goldfarb in The Stock Market
June 30th, 2011

Investor worries over Paypal being regulated by the Federal Reserve as a “payment network” were lifted Thursday and shares of eBay have surged nearly 5% since the ruling.

ebay paypalShares of eBay have seen nearly a 5% surge since Thursday as the new Federal Reserve rules have stated that alternative payment systems such PayPal are not payment card networks subject to a provision known as the “Durbin amendment” which puts a cap interchange fees.

Regarding the decision, Youssef Squali, an analyst at Jefferies stated “the primary reason Paypal does not seem to fall under the definition of a payment card network is that for any PayPal transactions that take place between a merchant, a customer and the customer’s bank with PayPal as the payment operator, the transaction is settled on PayPal system (versus being routed to the individual parties), whereby PayPal makes the appropriate debit (customer) and credit entries (merchant).”

The new Federal reserve rules are anticipated to greatly boost eBay’s PayPal unit which is the fastest growing segment of it’s business. Paypal will also benefit from the significant ruling many eBay investors were fearing regulation would cost Paypal millions, if not billions of dollars in the long run.

As a result of the ruling, Bank of America analysts upgraded shares of eBay to “buy” from “neutral” Thursday morning stating there was a 25% upside to $38 price objective, which has remained unchanged.

Citigroup analysts also upgraded the stock to “buy” from “hold”. They raised their price targets to $38 from $36, and raised their 2012 price-to-earnings target multiple to 17 from 16.

With an estimated $2.22 billion in payment transactions estimated to flow through PayPal in 2012, it should mean approximately $74 million to $96 million in cost savings.


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