Oct 29, 2015 ยท 5 minutes

I'm not sure this is what Carl Icahn had in mind when he clamored for spinning off PayPal from eBay.

When the two companies formally separated on July 20, the consensus was that PayPal had the brighter future, while eBay would be facing declining growth in its aging e-commerce business. For the next three months, it turned out, neither fared particularly well. Both PayPal and eBay fell 14 percent in that period, much worse than the Nasdaq's 6-percent decline.

Now that both companies have reported their earnings, their numbers have diverged – although probably not in the way that many expected. eBay is trading 16 percent higher since it posted earnings on Oct. 21. PayPal reported its first ever earnings report as an independent company yesterday, and promptly slid 5 percent in after-hours trading.

The divergence may be a temporary phenomenon, since much of it had to do with expectations. The bar had been set low for eBay after third-party data showed its growth well below that of Amazon and e-commerce in general. Instead, eBay's revenue and profit alike leaped over the bar set by analysts.

PayPal, meanwhile, reported GAAP revenue growth of 14 percent to $2.3 billion, a bit below what analysts were expecting. Factor out a strong dollar, and revenue grew by 19 percent. For the full year, PayPal is still forecasting revenue to grow between 15 percent and 18 percent on a dollar-neutral basis, below the growth rate of recent quarters.

This was enough to scare investors. On a conference call discussing the quarter's earnings, one analyst asked PayPal CEO Dan Schulman why the revenue-growth rate had slowed from recent quarters and why the full-year guidance implied still slower growth ahead. Schulman said some vague things about dollar-exchange rates and left the question answered largely with uncertainties.

Before its spinoff, PayPal was seen as the crown jewel among the eBay assets Icahn agitated to break up. The idea was that  an independent PayPal would somehow flourish and that, if eBay did okay, well that was a nice bonus. Icahn, in a statement that has since conveniently vanished from his vanity site (a copy is preserved here), said both companies would be “well positioned” after the breakup and that he hoped his involvement in the matter would create "meaningful value for all shareholders.”

So far, that isn't happening with PayPal, which officially began trading on Nasdaq on July 20 at $41 a share and was lately trading at $35 a share.

It's easier to explain eBay's rally in the past week in light of the image that stuck to the company after the spinoff, that of a mature – read: declining – e-commerce company. That's not quite happening yet: The marketplace's revenue declined, but if you factor out those troublesome foreign-exchange rates, eBay's revenue grew by 5 percent.

eBay also managed to add two million active buyers in the quarter, an improvement over previous quarters. That helped it feel comfortable about raising its earnings estimates for the full year to $1.59 a share from its previous guidance of about $1.43 a share. It seems the old e-commerce veteran still has some life left in it.

It's one thing to say that eBay is doing better than expected, and quite another to say PayPal is doing worse than expected – because there's no clear explanation for the disappointment. PayPal has a lot going for it, including the most established digital-payments platform in the world as well as newer, promising businesses in Venmo, Braintree and Xoom.

Venmo, for example, processed $2.1 billion in payments, an increase of 200 percent in the past year. PayPal will begin monetizing Venmo this quarter by offering it as a payment option to the merchants that already accept PayPal. Xoom could strengthen PayPal's position in overseas markets and, with PayPal's clout behind it, could better take on incumbents like Western Union.

The thing is, PayPal faces the same issue facing all digital-payments products, from Square to Apple Pay. Consumers aren't feeling a compelling need to use them at the scale these companies dream about. Meanwhile, the incumbents most ripe for disruption by them – the credit-card giants Visa and Mastercard – continue to live off the fat of the land.

PayPal has noted it handles only 1 percent of its addressable market of digital and in-store commerce. That's a massive opportunity but also a measly accomplishment for a 17-year-old e-payments company. Take a look at page 11 in this pdf document from PayPal. The company has 173 million active customers who made 1.2 billion transactions totaling $70 billion in volume last quarter.

Big, impressive numbers. But consider the footnote that says “active customer accounts” are any that have “sent or received at least one payment or payment reversal” in the past 12 months. If you reversed a PayPal payment and did nothing else in the last year, you're in there. Growth in these active accounts has slowed to 10 percent from 14 percent a year ago.

PayPal also says that transactions per active account rose to 27 last quarter from 24 a year ago. Again, sounds good but if you look at the fine print, you realize this means PayPal customers on average make two to three payments per month. Good enough to keep PayPal busy but hardly a disruptive force in commerce. How many times have you pulled out your credit card in the past week alone? How many times did you pay with cash?

I don't mean to pick on PayPal's metrics, since the company will remain a leader in digital payments for a long time. My point is that, if PayPal can't crack this potentially vast market and sideline the credit-card companies that any merchant, large or small, will agree are charging way too much, who can? For all the hype surrounding fintech, most people are still relying on plastic, paper and metallic methods of payment that existed before the Internet.

PayPal, along with every company in its market, still has a big opportunity ahead of it. That's the good news. The bad is that it's looking less likely they will tap that opportunity in a meaningful way any time soon. Meanwhile, PayPal seems to be slip-sliding away from that goal with revenue growth that is declining rather than accelerating. Surely, eBay can sympathize.