The Right Time to Buy eBay

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

eBay (NASDAQ: EBAY) fell by more than 6% after the company missed earnings estimates by a cent last week. The market usually overreacts to short-term news, especially on the negative side, and this seems to be the case with the online retail giant. In case you were waiting for a good entry point, this looks like the right time to press the buy button on eBay

The Numbers

The company reported a revenue growth of 14% for the last quarter, which translated into earnings per share growth of 12% year over year. The figure was a literally one cent below consensus estimates at $0.63 versus $0.64 expected on average by Wall Street analysts. eBay´s guidance for the next quarter was also softer than expected, and that was another reason for disappointment.

But the company is doing well in several key strategic areas and positioning itself for growth over the next years. Management talked about weakness in Europe and currency headwinds as reasons for the uninspiring earnings guidance, but eBay still has ambitious targets for the middle term: the company expects to enable $300 billion in commerce volume by 2015, a considerable increase versus $175 billion in 2012.

PayPal continues performing strongly with a 20% increase in revenue. The payments platform finished the quarter with 132 million active accounts globally, adding 4.7 million new accounts during the period. Merchant services generated strong growth of 29% for the quarter and represented $30 billion of payment volume. PayPal’s net total payment volume grew 24% to $43 billion driven by consumer and merchant use of PayPal both on and off eBay.

Marketplaces saw revenue of $2 billion, increasing 10%, or 12% excluding the gain from the resolution of an indirect tax dispute in 2012. Marketplaces gained 3.5 million active users in the period and ended the quarter with 120 million, a 14% increase. Gross merchandise value grew 13% over the prior year on a global basis, and growth in the U.S. was a higher 16%.

Total commerce across all the company´s platforms was up 21% for the quarter, and eBay mobile attracted 3 million new customers in the quarter, a growth rate of 90% in its much important mobile business.

All in all, it’s hard to tell to what degree economic woes and currency translations can affect eBay over the next quarters. Maybe those hurdles are already incorporated into expectations, or perhaps things continue getting tougher on the economic front. Regardless of that, the company is still delivering sound operational performance, and that will be reflected in earnings growth for investors sooner or later.

The Business

Amazon.com (NASDAQ: AMZN) is the market leader when it comes to e-commerce, but eBay has made an impressive comeback with its marketplace operations over the last years. The company has revamped its technology, improved its search capabilities and increased its focus on fixed-price offerings as opposed to the older auction method.

Amazon will most likely continue outgrowing eBay due to its aggressive competitive strategy, but the e-commerce industry will have room for more than one relevant player, and eBay is quite comfortable in the second position.

Besides, Amazon and eBay are taking opposite sides when it comes to their relationship with brick and mortar retailers. Traditional retailers are seriously threatened by Amazon since the online retailer is stealing market share away from them. eBay, on the other hand, is an e-commerce facilitator building a bridge to the online world, so brick and mortar retailers have powerful incentives to befriend eBay in this competition versus Amazon.

When it comes to digital payments, eBay is the front runner in a business with enormous long-term potential. With 132 million digital wallets in the cloud, availability in 193 countries and strong brand recognition, PayPal has powerful competitive advantages.

The company is rolling out a new deal with Discover Financial Services (NYSE: DFS) to potentially bring PayPal to more than 7 million merchant locations across the U.S., and maybe to millions of international locations in the future. This agreement could be a massive opportunity for PayPal, even if it manages to capture a tiny portion of the addressable market under this deal.

Discover has been expanding in emerging markets via the acquisition of Diners Club International, a global closed-loop network, and it has reached agreements with banks in China and India to expand its operations. The deal with PayPal looks like a win-win situation for both companies in terms of integrating their networks and creating growth opportunities for both parties in the middle and long term.

As PayPal continues gaining acceptance among merchants, customers and partners, eBay is in a privileged position to benefit from the online payments boom for years to come.

Bottom Line

In terms of underlying fundamental strength and long term growth prospects, the bull case for eBay is as strong as ever. If anything, the recent pullback represents a buying opportunity to place a bid for this high-quality growth company at a discounted price.

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Andrés Cardenal owns shares of Amazon.com. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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