Where is eBay Looking for Growth?
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In March 2013, eBay (NASDAQ: EBAY) laid down aggressive targets for increasing its revenue. PayPal, which accounted for 40% of its 2012 revenues and reported 25% growth, will be the key factor in eBay’s future growth. But there's also another factor: The company aims to drive this growth by expanding globally and luring customers through its mobile technology.
The company announced plans to achieve $300 billion in e-commerce volumes by 2013, representing a 70% increase from its 2012 numbers. It seems to be on the right track to achieve this target as seen from its recent first-quarter results. Its first-quarter revenues increased 14% to $3.7 billion and included a 19% increase in its e-commerce volumes driven by growth in its mobile business and international markets. Its plans include a 15% to 19% annual revenue increase and 69% revenue growth by the end of three years.
More than 50% of the company’s revenues are generated through its international markets. Further, international business accounts for more than half of PayPal’s total revenues.
According to CEO John Donahoe, the number of Internet users is going to double in the next two years and 78% of these new users will be from BRIC and emerging markets. The company plans to tap this growing market and expects that by 2015, 25% of eBay’s active users and 12% of its global sales will come from these regions.
It is already serving the global markets, but there is still a lot of room to grow. The company is deliberately moving slowly in these regions as it tries to balance maintaining its margins and materializing the growth prospects.
One of the strong areas of growth in international regions is the increasing use of PayPal or other services. Currently, most of the transactions are done in cash in these regions. So as these economies improve and broadband access increases, there exists a huge growth potential to increase the use of PayPal. This will definitely help to reach its target of increasing its international sales by four times its current levels.
A recent example is the launch of eBay’s portal in Russia. The company has launched the Russian language portal and CEO Donahoe thinks that PayPal will help to overcome the payment difficulties that Russians face. Hence, apart from increasing its international reach, it will also benefit from the increasing rate of adoption of e-Wallet.
One area in which the company has met with great success is mobile and has even outperformed its archrival Amazon.com (NASDAQ: AMZN). In 2012, eBay generated $27 billion in mobile commerce and expects mobile transactions to exceed $40 billion.
Another indicator of the company’s growth in e-commerce is its increasing downloads of suite mobile apps. Downloads for its apps have surpassed 162 million, adding 2.8 million new customers. This has helped to drive double-digit growth in active users in online retail platforms and PayPal.
The mobile-commerce market is expected to grow from $3.4 billion in 2010 to $119 billion by 2015 and eBay is well positioned to take advantage of the growth in the e-commerce universe.
Combining its two key initiatives, mobile and international expansion, it launched its mobile-payment solution for small business, PayPal Here. It is now available at more than 2,700 SoftBank locations across Japan and also plans to roll out the chip and PIN version of PayPal in the U.K.
Amazon also recently released its first-quarter results, reporting strong growth in North America but slower growth in its international market. Further, due to the company’s heavy investments, the company also faced lower profit margins.
International revenue rose 16% versus 31% last year. The main area of concern was Europe. Amazon also struggled to grow in China and mentioned that it was still in investment mode in the region.
However, the weak results are not a concern. These investments should lead to future growth. The company is using its money to build warehouses closer to its customers, which will help in reducing its shipping costs.
Amazon has also expanded to other businesses, which are growing at a much faster rate as compared to its traditional retail operations. These businesses are proving to add much more to the bottom line. It includes cloud computing, advertising (revenue increased 59% in 1Q13), digital content and acting as an online marketplace for other merchants. Further, the company is investing in its Kindle family and aims to launch a smartphone later in the year. It is also rumored that it plans to launch a set-top box for TV content.
Slowly encroaching competitor
One company that is slowly encroaching on eBay and Amazon is Overstock.com (NASDAQ: OSTK). Overstock sells a variety of items, from electronics to jewelry to cars. Its product assortment, pricing and customer service are top-notch, which has helped the company to deliver strong earnings growth. Its first-quarter revenues increased 19% sequentially from its fourth quarter. This was largely driven by its 21% increase in its average order size. It posted a 24% increase in its gross profit and an 80-basis-point increase in its gross profit margin, mainly due to a shift in its product mix as well as lower warehousing costs.
This company may be a good buy for an investor who doesn’t want to invest in slow-moving stocks like eBay and Amazon. However, it has a high PE due to the recent rally in its stock price post its strong first-quarter results. The company’s share price has more than doubled to $24 versus $11 before the first-quarter results.
Competition is high and both eBay and Amazon are doing their best to gain market share. Amazon’s advantage over eBay is that the online retailer is a place to buy new products whereas eBay has the image of a retailer of used products. But eBay is trying its best to move out from this traditional image.
According to a Forrester report, online retail sales are projected to grow 10% annually to $370 billion by 2017 from $231 billion in 2012. The majority of this growth will be driven by the increasing adoption of smartphones and tablets. And this is exactly the area that eBay is targeting. Quarterly earnings may distract investors for the time being, but I would recommend holding the company for the long haul.
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This article is written by Audrey Echa - B.Com, Chartered Accountant (India), work experience at Merrill Lynch, Goldman Sachs, HSBC etc - and edited by Shas Dey, StockRiters' Editor-in-Chief. Neither StockRiters nor any of its Directors or employees have any position in any stock mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!