EBAY Earnings Report Card

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

On January 16 comes Q4 results for eBay (NASDAQ: EBAY). This is a very important earnings report for them as all their holiday PayPal promotions including price matching and the PayPal apps for Macy's will be graded by analysts. They won't be grading on a curve either and are likely to be quite strict as the company has already moved to the head of the class in 2012, up some 75.89% over 52 weeks.

EBay has to report earnings of at least $.61 a share for the quarter and $2.05-$2.35 for the full year to make a passing grade. Current profit margins of 28.52% and operating margins of 20.65% need to expand to impress the Street. Surprising analysts with their standards so high may be difficult, but eBay did actively promote during the holiday season.

To figure out what eBay should report they guided at the Q3 call for $10 billion from PayPal in 2012, up fivefold from two years ago. Analysts will also expect to see revenues improve from their auction site with this holiday season's "Buy It Now" initiative. Overall, analysts expect $14.06 billion for the full year.

 The Three R's

Revenues, return on equity, and retail adoption of PayPal are three subjects that eBay will be grilled on. Think of this particular release as a graduate oral exam for CEO John Donahoe with the thesis being that PayPal continues to gain traction amid competition from traditional credit card companies like Visa (NYSE: V) and MasterCard. Fool Rick Aristotle Munarriz pointed out that Visa could overtake eBay with their mobile wallet.  But not all credit card companies want to compete with PayPal, instead Discover Financial Services is collaborating with PayPal to expand PayPal to 7 million retail outlets. As  Don Kingsborough, PayPal’s Vice President of Retail said of the cooperative effort, "This relationship will deliver a truly seamless digital wallet, available most places consumers shop offline, which offers the speed, simplicity and security already enjoyed by 113 million active PayPal customers online."

Other risks to the ascendency of PayPal is square, a mobile wallet platform that has been adopted by Starbucks' 7,000 US stores and by many small businesses. Then there's lesser known Stripe and Dwolla mobile payment systems. In addition, Target, Sears, and Wal-Mart have teamed up with another two dozen retailers in their own consortium of mobile payment. Lastly, Isis is yet another mobile wallet platform made available by Verizon, AT&T and T-Mobile.

Traditional banks should worry about the threat of PayPal as an April 2012 survey found that 80% would be willing to adopt PayPal as a mobile wallet. Some would even consider traditional bank services from PayPal according to the survey performed by Carlisle & Gallagher Consulting Group. Only 60% would be willing to go with Google (NASDAQ: GOOG) wallet. Peter Olynick, card and payments practice leader of Carlisle & Gallagher, said that,"Within five years, half of today's smart phone users will be using their phones and mobile wallets as their preferred method for payments." And a 2011 Ernst & Young report  further predicted,"mobile payment services should reach $245 billion in value by 2014."

Investors may not be aware how far along eBay is coming as a financial solutions company with several software platforms for developers to write solutions for merchants and several payment options for consumers to charge items directly to their phone bill and BillSAFE which allows consumers to pay for purchases immediately upon receipt of an invoice. In this segment they are competing with Intuit's suite of financial applications.

Extra Credit

Analysts expect decent numbers from PayPal but it's the marketplaces division that's the unknown quantity. If eBay can't get that right they won't get any extra credit. Amazon (NASDAQ: AMZN) is a real threat to the auction model as so many of eBay's full time, hard core sellers abandon ship for the Fulfillment By Amazon program. And why wouldn't they when the FBA program is so much less work? Used to be hucksters would teach "How To Be An eBay millionaire" and now they're hawking, "How to be An Amazon millionaire" featuring the FBA model.

EBay's auction site has changed commerce forever as anytime you aren't dealing with bricks and mortar retailers people can go on eBay and say, "this is what it's worth". A friend of mine in the antiques business for 50 years says people come in, look up an item on eBay on their smartphone and  say," I won't pay a penny more". I won't tell you what this octogenarian tells them. Let's just say Tony Soprano would blush.

EBay may have been the pioneer but a multitude of sites now compete against their auction site including Etsy, Amazon, Gilt, Overstock, Quibids and many, many more much like the abundance of deal sites that compete against Groupon. Overseas competitor Alibaba announced last summer they were outselling  both eBay and Amazon. This may have been a catalyst for a partnership between eBay and Xiu.com, a luxury e-tail site in China forged in November.

The Final Exam

While eBay trades at a smaller P/E than direct competitors like Amazon, Google and Overstock at an 18.33 P/E and at a discount to the industry average of 29.03 it is their eBay marketplaces that analysts expect to be a drag on overall performance and return on equity. PayPal is the division full of promise even with burgeoning competition and it will have to shine, bettering its 23% revenue increase (yoy) for the division reported in the third quarter.

Marketplaces is the division that analysts will probably recommend for extra tutoring and likely its performance at earnings will drag down the entire class. In October Motley Fool analysts debated eBay's merits and decided that PayPal wasn't all that it's cracked up to be and that marketplaces was still chugging along. I disagree with that thesis but have the same conclusion that eBay is fairly valued, maybe even overvalued, and that expectations will be hard to beat with 3 analyst revisions upwards in the last month. If you believe in the name I suggest you cram in some due diligence before earnings.

leglamp has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, Google, and Visa. The Motley Fool owns shares of Amazon.com, eBay, and Google. 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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