eBay: Selling the Miners Their Shovels

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

There is an old saying that “In a gold rush, a good investor will look for the best gold mines, but the great investor will find the best shovel manufacturers.” With the ongoing holiday season resembling a gold mining season for retailers and e-commerce stocks, good investors are keeping a close watch on the gold miners, but the greats are looking for the shovels. And they are getting a pretty good deal in eBay (NASDAQ: EBAY), as it is the gold miner with the shovel. 

PayPal-The Shovel Business

eBay purchased Paypal in 2001, and since then it has gone on to become one of the most used payment gateways on the internet. Paypal is the one thing that completes the eBay’s growth story in style. eBay with PayPal offers the complete online retail solution ranging from marketplace to payments to free shipping. eBay has been working continuously to gain even more exposure to its PayPal service with continuous agreements with big players. After PayPal announced its partnership with Discover (NYSE: DFS) in August, which is poised to showcase PayPal to around 7 million offline merchants across US, it has also struck a deal with ParkMobile, a top provider of mobile payment solutions to parking providers in 350 cities with millions of registered users. I believe that Paypal will gain market share and momentum as the deal will be rolled out across the whole of ParkMobile’s base. Furthermore, with the mobile payments market expected to grow to $640 billion by 2015, I believe that eBay is well positioned to profit with its dominant position.

The Growing Disconnect from the Auction Based Model

The main reason why investors have put eBay far below Amazon (NASDAQ: AMZN) is their lack of confidence in eBay’s auction based model. But now retail is a whole new game. eBay has been gaining ground as a fixed goods seller, as is apparent from the Channel Advisor SSS reports for the month of November. According to Channel Advisor, eBay has continued increasing its fixed price business at 38.5% YoY, while the auctions have continued to decrease. As eBay is in the process of establishing itself as a fixed price sale portal, I believe that it offers a higher value to the investors. Furthermore, eBay showed a strong SSS growth of 27.4% YoY compared to 18% growth rate a year ago. The month of November has fared pretty well for eBay considering the Black Friday weekend sales plus the Cyber Monday sales. With the holiday season going to continue in December with year-end sales, I believe that eBay is bound to see a whole lot of action.

The Price Factor: Is eBay overpriced? No. Is its peers are? Yes. 

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eBay currently trades at a trailing PE of 17.66, which is far lower than that of its peers. Comparing eBay to its peers like Amazon, Overstock (NASDAQ: OSTK), Visa, and Mastercard, we can easily see that eBay offers the most complete package with good yield and operating margin at a lower price. While Amazon is also positioned to profit from the holiday season sales, its lower operating margins and a high price puts it at a disadvantage to eBay. The other competitor, Overstock, just has one profitable quarter to its name and loses when compared to a much more recognized brand of eBay. While Visa and Mastercard provide significant competition to eBay in the payments space with good operating margins, I believe that eBay is a pure play in the retail segment with the combination of Marketplace and Payments businesses.

The Bottom Line

eBay has been here from the beginning of the internet. While the Marketplace business has had little success until now with the auction based model, it has sustained the hits and has progressed to become second only to Amazon in the e-commerce world.  With the continued advancement in the fixed price business, I believe that the Marketplace could bring some heavy revenues with its high operating margins. In the meantime, the Payments business has grown wings and has seen continued successes with its sustainable competitive advantages. A partnership with Discover and Parkmobile will help it gain a whole lot of market share. 

gauravguru has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Walt Disney. Motley Fool newsletter services recommend Amazon.com, Walt Disney, 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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