The Platform is Everything

By Chad Henage - July 27, 2012 | Tickers: AMZN, EBAY, TGT, WMT | 0 Comments

• Email
• Print

If there's one thing that investors can take away from eBay's (NASDAQ: EBAY) most recent earnings report, it's that the platform you use means everything. The company originally started out as a platform for buyers and sellers to get together via a traditional auction method. Over time, the company added a fixed priced option as well. The company acquired PayPal and made it the default payment method on its website. Now the company is transforming PayPal into a service that goes far beyond traditional eBay sales. The company is proof positive that even in the heavily competitive space of internet retail, constant innovation comes out on top. 

Two Winners and Everyone Else

Among internet retailers, there are two winners and everyone else is a pretender. One of the winners is clearly Amazon.com (NASDAQ: AMZN), as the company has established itself as a destination shopping center online. The second winner is definitely eBay, which has established itself as the auction leader. I know, personally, that I usually check both of these sites before making any big purchase decisions. Uncertainty caused by dealing with other individuals initially scared a lot of consumers away from internet auctions. However, eBay has made the experience as positive and safe as possible. With overall revenue up 23% and earnings per share up 16%, eBay had a very successful quarter. You can see just how much trust consumers have in both eBay Marketplaces and PayPal when looking at the growth that each division posted last quarter.

PayPal – The Growth Engine:

I've made the argument in the past that PayPal will at some point become more important to the company than its traditional marketplaces business. At least by one measure, PayPal is now officially more important, and that is in number of active registered users. PayPal currently has 113.2 million registered users, which represents a 13% increase over last year. With total revenue up 26% and payment volume up 20%, you can see that users are very comfortable with this payment platform. In addition, the company announced that 16 large brand-name retailers have announced their intent to work with PayPal on point of sale solutions. As PayPal goes beyond a system to pay for eBay purchases, investors will need to watch the growth of this division carefully. The more retailers that sign up for point-of-sale capabilities with PayPal, the more likely consumers will begin using this service over their traditional credit card. Given that the service is secure and does not require consumers to give out their credit card numbers, many customers are likely to feel safer using PayPal as their payment method. Though PayPal is growing faster, eBay Marketplaces is still doing quite well.

eBay Marketplaces – Not Done Growing Yet:

eBay Marketplaces has 104.8 million registered users, which is an increase of 8% year-over-year. The company saw the strongest gross merchandise volume sales increase since 2006, with a 15% gain. The total number of sold items increased 20%, which matched the increase in fixed price sales. While many people think of eBay and immediately think auctions, 65% of transactions were actually fixed price sales. This is something that Amazon.com I'm sure is aware of, as more fixed-price sales mean a greater threat to Amazon as well as to other retailers. I've heard the concern about showrooming in the past related to Amazon stealing traditional retailers' business. However, direct price competition also occurs between these two internet retailers as well. For instance, it's very simple for me to go to Amazon to look up an item, open a new tab in the browser, and look up the same item on eBay. Because eBay is simply the platform that the seller is using, in many cases the fixed price on eBay is cheaper than what Amazon can offer. Needless to say, this same dynamic also occurs when shoppers go to traditional retailers as well.

eBay – Mobile Monster:

In fact, one statistic that traditional retailers such as Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) should be aware of is, the fact that eBay's mobile apps have now surpassed 90 million downloads. Most of these apps include some type of barcode reading capability. Consumers can stand with their smartphones near an item in the store, scan the barcode, and see what auctions match what they are looking at in person. I've personally done this for larger ticket items at multiple retailers in the past. While I don't always find a deal that I want, even if I do just a few times, this hurts the future growth of these traditional stores. In addition, eBay might be the only company I can think of that makes a lot of money selling other people's things.

Sell Other People's Stuff – Make Tons Of Money:

The company has done so well selling other people's items, that eBay bought back $355 million worth of stock in the current quarter and authorized an additional $2 billion repurchase program. At first, ebay's operating cash flow appears to be down slightly. However, the company had line item adjustments for divested businesses both this year and last year. Without these one time items, the company grew operating cash flow by 68.12%. With $7.6 billion worth of cash and cash equivalents, the company has the capital, the platform, and the continuing innovation to compete effectively well into the future.

Conclusion:

With traditional retailers such as Wal-Mart and Target expected to grow earnings at 8.3% and 11.16% respectively, you can see that internet retailers have a different growth trajectory. In fact, I would suggest that eBay's projected growth might be low considering the company's fast growing PayPal division. Analysts expect 13.31% growth from the company going forward. However with PayPal growing revenue at 26% this last quarter, and moving beyond the bounds of internet payments, I wouldn't be surprised to see eBay beat earnings estimates. While Amazon is expected to have huge growth of 34% or better, there is an equally huge difference in the two internet retailers' gross margins. In the most recent quarter, Amazon's gross margin was just under 24%. By point of comparison, eBay's gross margin was almost 71%. While Amazon has the higher expected growth rate, the difference in the valuation of the two companies is much too large. In fact, eBay sells for about 1/10 of Amazon's forward P/E ratio. This massive difference in valuation and the direction of the company's PayPal unit, should be reason enough for investors to consider eBay as a potentially better investment.

• Email
• Print
• Feedback