eBay Payday
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Good Times
eBay Inc (NASDAQ: EBAY) has been killing it recently. In its latest quarter, revenue growth came in at 23% to $3.34 billion (year over year) and its earnings grew to $730, a 16% (y-o-y) increase, which was better than expected. PayPal continues to do very well, as total revenue growth came in at 26% and the amount of active registered accounts increased 13% (y-o-y) to 113.2 million. This led to PayPal's total payment volume to come in at $34.5 billion for the quarter, which is a 20% increase (y-o-y). eBay's online marketplace, which competes with the likes of Amazon.com Inc (NASDAQ: AMZN), has also been robust as eBay revamped the e-commerce site to stay competitive with other e-commerce sites. It saw 9% (y-o-y) revenue growth, a big improvement over the past several years, which prompted the CEO to say "This is the strongest performance we’ve seen out of marketplaces since 2006." This revamping has led to eBay now having 104.8 million active users in its marketplaces division (8% growth y-o-y), which is still significantly less than Amazon's ~170 million, so it could have more room to grow.
Valuation?
eBay is expected to grow its EPS by 16% next year and 13% over the next few years. This, coupled with high top line (revenue) growth should merit eBay a better PE than 15.9 (TTM). It has a PEG ratio of 1.2 compared to the industry average of 1.8, and its price to cash flow ratio is 12.09, far less than the 21.43 industry average. Relative to its peers, eBay is a cheaper investment, but it isn't growing as fast as an Amazon, which is expected to grow its bottom line by 35% over the next few years.
PayPal PayDay
Where eBay is really killing it is PayPal. As I said before, PayPal saw revenue growth of 26% in its latest quarter, and the quarter before than it grew by 32%. The biggest thing going on with PayPal is its active registers user’s growth. The more users that are register to PayPal and using it frequently, the more money eBay makes. Right now that base is at 113.2 million, but Trefis.com (a 3rd party research site) thinks that will grow to 121 million by the end of 2012, a 6.9% increase, which seems doable because at the end of 2011 Q4, the active user count was at 106.3 million, and has since grown 6.5% in six months. Since the end of 2010 Q1, the active registered user count has grown by 34.2%, which is 3.8% growth every three months. Not bad. Using some simple analysis, by Q3 PayPal should have 117.5 million active users and 122 million by Q4, which is an extra million over what Trefis is forecasting.
Another bullish thing about PayPal is the payments per account growth. In 2008, that number was about 1.18 per month, but has since grown to about 1.5 per month (per user). As consumers purchase more using PayPal, eBay obviously makes more money. This is expected to continue to trend upwards and to hit 1.6 by 2019 (according to Trefis), but due to recent growth, I wouldn't be surprised to see that number hit 2 or more. Mobile is another area PayPal is killing it. In 2009, the estimate for average payment per user on mobile was $1.56. That number has since grown to $37.63 by 2011 (both numbers from Javelin Strategy and Research). The reason why this is such as bullish sign for eBay is because eBay takes a percentage cut of the purchase, which means the more purchases there are and the bigger they are, the more dough eBay can rake in and reinvest in its business. Here are two graphs that show the growth of PayPal.
Change is good
In eBay's latest quarter, one thing that got Wall Street really happy was its marketplace growth. In order to remain competitive, eBay revamped the design of its webpage and switched from bidding to a more fixed cost approach. This must be working, as this segment saw 9% (y-o-y) growth in revenue, and 15% growth in gross merchandise volume (total sales), it’s strongest since 2006. Also on mobile, the total downloads for the eBay mobile app has reached 90 million, 12 million more than in Q1 (which was at 78 million). Mobile continues to be an area where eBay does well, while on the other hand companies like Facebook Inc (NASDAQ: FB) have no way of monetizing their strong presence on mobile. Facebook was a platform built for the desktop, so when people started switching to mobile, they weren't on top of the ball and can't make any money off of their mobile users. While Facebook is probably going to start advertising on mobile, it should have been doing so much earlier.
eBay, though, was right there at the right time. When the smartphone revolution started and everyone was getting data plans, eBay was there with a mobile app that allows you to bid and buy anything on eBay anywhere. One silly example of some unintended benefits of having a mobile e-commerce app: When an eBay user gets drunk at a bar, instead of having to go all the way home to "drunk purchase" stuff they don't need, they get do so right from their phone in the cab right home. Good news for those who like buying things they don't need while intoxicated and good news for eBay shareholders. When eBay's marketplace does well, not only does it benefit that segment, but it also helps out PayPal. I know my parents didn't have a PayPal account until they started using eBay, so eBay is a way to get consumers to come in and sign up for a safe and secure PayPal account, and to buy things off of eBay. People come to eBay all the time to buy and bid on random things, and when they do PayPal gets free advertising. Similar to when people go to buy things off of Amazon, they see a big add for the Kindle Fire right in the front of the screen.
Cutthroat Competition
The retail sector is notoriously known as being cutthroat, having low margins, and having competition lurking around every corner. The two biggest players in the online retail market are eBay and Amazon. One advantage both these companies have over brick-and-mortar retailers such as Wal-Mart Stores Inc (NYSE: WMT) and Target Corp (NYSE: TGT) is that in most cases they don't have to pay sales tax, which makes their products cheaper. Many retailers, especially Wal-Mart, have cried foul and are lobbying aggressively to get online retailers to pay sales tax. Most brick and mortar retailers are more scared of Amazon and eBay than the other way around. You never hear eBay say that brick and mortar stores stole away market share from them, but you hear in conference calls from Target, Wal-Mart, and any other big chain that e-commerce continues to hurt them. While Target has managed to post some strong same store sales (up 3.1% in July), Wal-Mart has been feeling the heat. In 2010 and 2011, Wal-Mart's same store sales decreased by .7% and 1.5% respectively, but have been recently posting a comeback. The brick and mortar stores aren't a problem for online retailers. Their problem is primarily a weak "recovery" and lackluster consumer spending as the unemployment rate has remained above 8% for over 40 months.
Another big benefit eBay has is it has high margins, as compared to the traditional low margins other retailers have. At Wal-Mart, its operating margin is 5.65%, at Target, 7.62%, and at Costco Wholesale Corp, another huge big box retailer, it is even lower at 2.79%. eBay on the other hand has a nice 20.45% operating margin. This is largely because eBay is more than just a retailer; it also offers a great online payment platform. Companies like Costco have to spend billions building out new warehouses and stocking up on inventory, where eBay doesn't have to. eBay just lets other people sell stuff on its website and it just takes its cut. eBay has a huge advantage over traditional retailers, as does Amazon, so don't worry about them as competition. Big box retailers will try to get a presence online, but for now that presence remains unimportant and insignificant.
eBay should be primarily looking at Amazon to see what it is doing, but it should also be looking out for any other e-commerce site like Blue Nile Inc. Blue Nile is an online store which specializes in diamonds and jewelry, but eBay sells all kinds of stuff, so Blue Nile is only a competitor in a small sector of eBay's overall marketplace. With limited competition (from big companies) in the online retail sector, eBay should continue to do very well with its marketplace division. Online retailers have huge advantages over their brick and mortar competitors, which is always a plus when you're in something as competitive as retail.
Final Thoughts
eBay is a well-run company and should continue to see its stock price head higher in the years to come. PayPal's growth will keep pushing eBay up higher, as will the current turnaround in its online marketplace. While eBay isn't dirt cheap, it isn't expensive either, and would be a great long term buy. If the stock takes a dip, it is definitely worth looking at. I'm bullish on online retail, and I'm bullish on Amazon and eBay.
callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Costco Wholesale, and Facebook. Motley Fool newsletter services recommend Amazon.com, Blue Nile, Costco Wholesale, eBay, and Facebook. 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.If you have questions about this post or the Fool’s blog network, click here for information.
