EBay (EBAY) shares are returning to earth. After shooting up more than 11 percent on Tuesday on news that the online auction company plans to spin off its PayPal unit next year, eBay's stock price was down nearly 2 percent in morning trade.
Some investment analysts also don't seemed sold on the deal's benefits for eBay. Moody's Investors Service said in a statement that it would review the company's credit rating for possible downgrade because "eBay's planned spin-off plan will result in a smaller company, with a weaker credit profile than the current combined business."
The message? What's good for PayPal, the online payment service that eBay bought more than a decade ago, and for activist investor Carl Icahn, a large shareholder in the company, may not be good for eBay in the short term.
A closer look at eBay's business underscores the hit it will take when PayPal is cut loose (see breakout at bottom). Ebay's core revenue comes from its so-called marketplaces and enterprise offerings, the latter of which involves developing e-commerce sites for traditional brick-and-mortar companies. It also makes money from PayPal's online payment service.
Sales from eBay's marketplace services grew 23 percent between 2011 and 2013. But that paled compared with PayPal's growth, with payments up 84 percent over the same time period. EBay's enterprise sales also grew fast, but that unit is small to the company's other divisions.
Along with losing a big share of its business, eBay faces growing competition from Amazon (AMZN) and from Alibaba (BABA), which just staged the largest IPO in history. The Chinese e-commerce giant plans to expand in the U.S., a frontal assault on eBay.
Between a reduction in growth and the potential for increased competition, investors are already voicing their concerns. EBay faces a major challenge allaying their fears.