PayPal’s Still Paying Off for eBay, But For How Long?

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

Another quarter is in the books and eBay (NASDAQ: EBAY) continues to prove why it is considered a powerhouse in the realm of e-commerce. In the company’s strong fourth quarter performance, it continues to be PayPal, which eBay acquired a decade ago, that is still paying off handsomely for the company and its loyal investors. But was it enough to dispel concerns about its long-term potential?

Bidding Up Shares Ahead of the Report

Ahead of the report, there were some uneasiness as to whether or not eBay would beat its numbers. However, after shares reached a recent low of $49.20, optimism kicked in, sending the stock higher by 7% prior to Wednesday’s announcement. The company did not disappoint.

The e-commerce giant posted revenue of $3.99 billion and non-GAAP profits of 70 cents per share – beating Street estimates of $3.98 billion and 69 cents with revenue surging 18% year-over-year. The better than expected results were helped by the strong performance of PayPal, which generated a 24% increase in revenue to $1.5 billion.

Likewise, the net total payment volume jumped 24% to $41.5 billion – of which 18% of payments arrived on eBay and 28% outside of the site. The company saw a 16% increase in marketplace revenues as gross merchandise volume (non-vehicles) reached $19.1 billion.

eBay continues to do remarkably well in this area with U.S. gross merchandise volume showing strong improvements of 19%, while international growth was 14%. In terms of guidance, the company projects revenue of $3.65 billion to $3.75 billion, with non-GAAP profits of 60-62 cents per share - slightly below consensus estimates of $3.79 billion and 63 cents a share.

For the full fiscal year, the company expects revenue of $16 billion to $16.5 billion. Non-GAAP profits are expected between $2.70 to $2.75 per share – falling in-line with Street estimates of $16.3 billion and $2.74 per share.

Moving Forward

The company deserves a considerable amount of credit for this performance. For its strong showing in the quarter, CEO John Donahoe said:

“We had a great finish to an excellent year, with fourth quarter results exceeding our expectations. eBay Marketplaces in particular had a terrific fourth quarter, with growth in the U.S. accelerating three points, outpacing e-commerce. Double digit user growth across the portfolio, strong gains in mobile adoption, and accelerating growth in the company’s Marketplaces business.”

Donahoe touched on the key driver of this growth – mobile. This is the area that eBay must dominate in order to fend off competitive threats from the likes of Square, which offers a pocked-sized credit card reader that plugs into your device’s audio jack.

Square makes it easy for small businesses to accept credit cards without installing a high-fee terminal. Today, Square is estimated to process close to $5 million worth of daily mobile transactions. This makes Square a legitimate threat to PayPal. Likewise, eBay should not overlook Apple (NASDAQ: AAPL) and its own mobile payment ambitions.

With the popularity of iTunes’ marketplace, Apple may figure out that it need its own “PayPal-type” entity. In a story posted on CNBC last year, I talked about this possibility that Apple could kill off payment systems such as VeriFone (NYSE: PAY).

It became apparent that cash and credit cards from Visa and MasterCard might one day become unnecessary as everything would be paid via smartphones. Today, VeriFone terminals are everywhere. However, the need to offer convenience while minimizing long delays during checkout is proving to be a top priority among merchants.

To remain competitive, businesses that once relied upon VeriFone will be forced to find ways to expedite the checkout process. Apple will be at the top of their choices. Consequently, eBay must figure out a way to leverage its current platform and PayPal’s popularity. This is the only way to remain at e-commerce’s forefront.

eBay and (in particular, PayPal) has to work better with mobile devices. So far, it’s been a good start -- eBay said that its mobile app has been downloaded on more than 120 million devices. While calling mobile payments “the new normal,” CEO Donahoe predicted that PayPal and eBay’s marketplaces division will each process more than $20 billion in mobile transactions this year.

Bottom Line

The growing popularity of smartphones and mobile devices is constantly changing the way people shop and pay. How will this affect eBay and PayPal tomorrow? To the company’s credit, this shift has already been anticipated and the groundwork is in place.

The extent of their success will determine their long-term viability. In the meantime, investors should expect continued growth from eBay over the next several years. The stock remains a buy and the possibility that shares could reach $60 by the second half of this year is very realistic. 

rsaintvilus has no position in any stocks mentioned. The Motley Fool recommends Apple and eBay. The Motley Fool owns shares of Apple 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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