eBay's Fortunes Are Headed North

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

Online auction leader eBay (NASDAQ: EBAY) has been surging ahead with its e-commerce platform, and along the way built a massive internet-driven payments infrastructure. And that's not all: Its PayPal division has been growing at an astonishing rate, putting the company in pole position to capitalize from the secular change in consumer payment preferences. And to cap it all off, PayPal is now going mainstream at a merchant location near you, thanks to its marquee partnership with Discover (NYSE: DFS), which starts off in mid 2013.

eCommerce Business in Transition

eBay had always played second fiddle to Amazon's (NASDAQ: AMZN) eCommerce platform by functioning as an auction site. However, eBay's core marketplace business transitioned significantly thanks to increased user acceptance, major website improvements, and a safe and secure payments platform.

Just five years ago, listings on the site were 70% auction and 30% fixed price. At the end of 2012, 70% are fixed price items and 30% auctions, and more than half the products have free shipping, just like eBay's e-commerce rival Amazon.com. Monetization of eBay is significantly better than Amazon as well, since eBay primarily functions as a facilitator of commerce, rather than a fulfillment center. The company’s net income margin of 18.4% is significantly higher than the low single digit margins of Amazon.

Expanding International Footprint

eBay's growth is fuelled by an increased number of sellers doing higher-volume transactions, and by strong international growth. The latter trend will likely gain more momentum, as eBay plans to extend its presence further in emerging markets, particularly the BRIC countries. More than half of its revenues come from outside the U.S, which gives rise to a higher number of cross-border transactions, from which PayPal earns higher transaction fees. The number of active users on eBay's e-commerce platform now stands at approximately 112.3 million. 

PayPal and Mobile Are Growing Rapidly

Not only is the company growing in e-commerce, but it also had extremely strong growth in its payment division. PayPal continues to increase merchant coverage, handling 692 million payment transactions in Q4 -- the busiest quarter in PayPal’s history. PayPal’s has been gaining increased consumer confidence fuelled by its brand name, and as a major facilitator of transactions for the consumer-to-consumer (C2C) market. It now has roughly 123 million active accounts, and it added 5 million new accounts in Q4, the service's biggest gain in eight years.

A large part of eBay's recent success has been driven by the solid positioning of the company on mobile. More than 120 million people have downloaded eBay's mobile payment apps.

In 2012, PayPal's customers made $14 billion in payments on mobile devices alone, which represent a staggering 250% year-over-year increase from the $4 billion processed in fiscal 2011. Mobile payments now make up 10% of all payments processed by PayPal.

The amazing growth in mobile is happening in part due to the smooth transaction experience of PayPal on mobile. eBay's Bill Me Later division, a point-of-sale credit provider, also helped drive transaction volumes for the company. And going forward, PayPal could gain more acceptance amongst consumers in eBay's ecosystem, which would provide an additional tailwind for growth.

Going Mainstream With Discover

PayPal’s partnership with Discover Financial Services, struck in August 2012, will kick off in Q2 2013, providing PayPal access to the 7 million U.S. merchant locations that accept Discover.  In addition to Discover, PayPal signed up 23 major retailers like Home Depot and Foot Locker to provide point-of-sales solutions; it's now accepted at 18,000 retail locations in the U.S. In addition, Discover has access to millions of merchant locations in the global market, and over time, PayPal will be able to tap that huge market segment as well. 

Discover has been competing on a much smaller scale with the other major credit card companies, and this deal provides Discover with the ability to tap into PayPal's 123 million customers. This partnership is a win-win for both the firms, as Discover's credit card rival, Visa (NYSE: V), sets up a digital wallet service called V.me, which directly competes with PayPal's wallet. Visa has been signing up web-based retailers for the roll-out of its V.me service.

Also, the launch of PayPal Here, a mobile-based card reader that allows anyone to accept payments, will take place on a much wider scale and will compete directly with Visa backed Square for on-boarding more merchants. 

Strong Financial Footing 

eBay stands on very sound financial footing while enjoying robust growth. For fiscal 2012, revenues rose 21% year over year to $14.1 billion, while net income came in at $2.6 billion. The business recorded strong cash flow from operations of $3.8 billion for the year, and generated very healthy free cash flow of $2.6 billion. The company also has a share repurchase program in place, mainly to offset dilution from share-based compensation. 

The Bottom Line

eBay's transformation from online auction champion to payments leader has steadily taken place over the years. With a wide range of internet businesses in its portfolio, enviable mobile positioning, and a growing number of users in its PayPal and e-commerce platforms, it has a lot of upside. The company's financial position is very strong, and now it's tapping into the offline retail market with Discover. Better yet, PayPal already has a lot of regular users who will be using the service offline. Surely, eBay's fortunes are headed north in the long term. 

ishfaque has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, and Visa. 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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