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Canaccord Ups Target to $56; Can Higher Growth Be Reached?

Canaccord Genuity’s Michael Graham today reiterates a Hold rating on shares of eBay (EBAY), while raising his price target to $56 from $50, writing that there is “still room for modest earnings upside” despite a dramatic expansion of the stock multiple last year from 11 times forward earnings to 19 times.

Graham raises his EPS estimate for this year from $2.76 to $2.78, but his “sensitivity analysis” suggests to him the company could make as much as $2.91 based on upside in its “Marketplace” business. If the PayPal payments service has a “breakout,” he writes, there could be as much as $3 per share in profit this year.

Graham’s analysis offers a 18% as the expected growth rate for “gross merchandise value” of Marketplace, with the possibility that it might be as high as 25%, which would add 5 cents per share to earnings. He sees a likely 18% growth in total payments volume, but if that were to rise to 25%, it could add 3 cents a share to earnings this year.

Graham describes some of the possible drivers of a higher growth rate:

While at least some of the low-hanging fruit on the GMV tree has been harvested (improved search/product discovery, user growth driven by mobile) we believe there is still more room to go, both with existing programs (vertical shopping categories, third-party storefronts, product recommendation engine, customizable feeds) and unannounced but potentially logical ones (more comprehensive product availability, eBay Prime?).

The outlook for Payments is for growth to continue to decelerate, he writes:

TPV decelerated meaningfully over the course of 2012, likely growing ~21% after growing 29% in 2011. We believe TPV growth is likely to decelerate again to ~18% next year, which is still a fairly high growth rate largely helped by mobile, without which we would be modeling a more significant slowdown. PayPal added between 3 and 4 million accounts per quarter over the course of 2012, and we are modeling 4 million new accounts per quarter next year, assuming that mobile will help drive this. We are modeling quarterly payments per account to increase slightly next year to ~5.4 from ~5.2 this year, as we believe mobile eBay shoppers will be more likely to use PayPal. Spend per payment has been declining steadily, perhaps driven by smaller purchases on mobile or perhaps by growth in lower dollar-value categories.

Those upper estimates could make the stock worth as much as $72, he thinks, though it would involve some multiple expansion. Graham is looking for more evidence the higher estimates can be reached:

Even in our reasonably optimistic scenario, we could see a case for further multiple expansion as EPS acceleration in 2013 would be more material. If we could gain more confidence that our optimistic scenario is more likely than not to materialize, it would make us more constructive on the stock.
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