Taking Part in the E-Commerce Revolution

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

When John Donahoe took the reigns as CEO of eBay (NASDAQ: EBAY) in March of 2008, the company was known as a flailing auction website in dire need of help. Founded in 1995 in San Jose, CA, eBay was a phenomenon in its early years. It had literally changed how people thought about how they valued the junk in their basements, and within its first few years of existence it grew rapidly, culminating in a stock price that tripled on its first day of trading.

The company then went on to experience peaks and troughs of successes and challenges in the 90's and early 2000's, and by 2008 the company, in conjunction with global economic challenges of the financial crisis and constant battles with other e-commerce titans, namely Amazon (NASDAQ: AMZN), was a dusty conglomerate with a great initial product and not much left of the innovation that had once made it a technology pioneer.

Since then, CEO Donahoe has made remarkable changes to eBay’s internal structure, key product lines, and mass consumer appeal. Fairly quickly, Donahoe was able to push company to piggyback on several major themes in technology that are growing, and quickly. The first is the proliferation of mobile shopping: by allowing consumers to shop directly from their smartphones, the company has driven double-digit growth in active users. In addition, PayPal (eBay’s payment-processing group), is increasingly being recognized as a pioneer in electronic payments. And, most notably, the site has undergone major transformation over the past few years: instead of the cluttered listing site it once was, the site is simple and elegant. It presents itself as a true e-commerce website: a left-hand panel allows consumers to shop by category or subcategory, on a variety of “products” from sports memorabilia to designer handbags.

Underneath the hood

In peeling the layers of the company fundamentals away, it’s evident that eBay is indeed a strong company steadily on the rise. The company is broken down into three business segments: Marketplaces (the auction and e-commerce site) that makes up roughly half of the company’s revenues; Payments (PayPal and Bill Me Later, which allows US consumers to get credit at the point of sale thanks to eBay’s relationships with financial institutions) and accounting for approximately 40% of revenues; and GSI, the segment that allows merchants to manage orders (many of which are large in scale), which comprises the last 10%.

In making year-over-year comparisons, the company saw commerce volume up 19% from 2012 in the first quarter of this year, a 14% year-over-year total revenue of $3.7 billion, and a non-GAAP diluted EPS of $0.63. All three segments continue to grow at impressive pace, with none lagging: as a highlight, PayPal added 5 million active registered accounts to 128 million and net total payment volume grew 21% to $41 billion, driven by strong underlying trends on consumer awareness. In addition, eBay’s margins have remained strong, with gross margins hovering around 70% and non-GAAP operating margins increased to 27.4% vs. 26.9% in Q1 of 2012. The firm also enjoys a strong cash position, with cash and equivalents coming in at $11.5 billion.

Other Internet e-commerce giants

How does eBay compare with other internet e-commerce retailers? The first that comes to mind is Amazon. While the two companies have fairly different business models, it is clear that Amazon is an exceptional company, but with an estimated NTM P/E ratio (diluted) of 140.7, it’s pretty much priced for perfection. eBay seems like a bargain in comparison, with the Street assigning it a NTM forward multiple of 18.7.

A small cloud looming on eBay and Amazon is that both companies are under pressure from Congress to begin collecting sales tax. This so-called Internet tax bill was passed in the Senate fairly quickly and would surely cause online retailers to lose out to brick-and-mortar retailers. Regardless, this is a known fact that shouldn’t weigh a great deal on the stock price in 2013.

Another eBay peer worthy of discussion is Taobao Marketplace, China’s version of eBay and owned by private company Alibaba. Taobao is China’s largest commerce-to-commerce online shopping platform in the country, and the website is geared for customers in Hong Kong, Taiwan, Macau, and mainland China.

Taobao derives the majority of its revenues from advertising, which, in general, has been exploding in China over the last five to seven years. According to iResearch, Chinese online advertising reached 75.31 billion yuan in 2012 and is now “entering into a period of steady growth.” Taobao impressively took in 17.22 billion yuan in ad revenue, approximately 23% of the total across all Chinese Internet media and right after Baidu. In addition, Taobao’s GMV (gross merchandise volume) was nearly $3 billion, while eBay’s reached $18 billion. However, while Taobao appears like an alluring standalone revenue-generator, the group cannot be bought into without looking at Alibaba as a whole. We shall explore Chinese e-commerce in more depth in a following article.

While there are a plethora of internet e-commerce companies that are boasting impressive profits,another that deserves mention as it relates to eBay is Overstock (NASDAQ: OSTK). The company is an online retailer that originally profited from the sale of surplus goods, and only recently has expanded its product offering to include new products as well. At the close of the first quarter of 2013, the company’s P/E ratio was 14.8, indicating that compared with eBay and Amazon, it’s still a fairly cheap stock. In addition, its most trailing twelve month price/sales ratio is 0.56, indicating the company may be potentially undervalued. Year-to-date, Overtock’s stock has improved from by a whopping 88% to $27, yet still has room to grow.

So, what do we do? Watch carefully and buy

We know eBay is a great company with strong fundamentals and a formidable management team, that’s currently capitalizing on several key trends (mobile e-commerce, the payment revolution). The problem is that this isn’t really news. The key, then, is to wait and buy the company on every dip. The stock is currently near $54 per share, just $4 under its 52-week high. Overstock is a company that seems undervalued when compared to some of its peers, and also represents a buying opportunity when the time is right.

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Colin Tweel has no position in any stocks mentioned. 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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