This E-Commerce Company Is Still Good for the Long Run

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eBay (NASDAQ: EBAY) has not performed well this year, as its appreciation of just 7% is behind the performance of the broader market. Last month, the company released second-quarter results, which were strong, but all was not great for eBay. Its forecast for the third quarter came in below expectations. Let us see what eBay did last quarter and examine if its weakness just a short-term event.

Review of the quarter

In its second quarter eBay reported revenue of $3.9 billion, which was 14% higher than last year, slightly beating the consensus. Furthermore, PayPal’s revenue increased by $1.6 billion, displaying growth of 20%, and eBay Enterprises booked growth of 19% in same-store sales. The strong performance was a result of innovation in the mobile segment and the smooth commercial experience that eBay provides to merchants and customers.

The company reported second quarter net income of $640 million along with EPS of $0.49. However, earnings declined in comparison to last year due to a divestment of subsidiaries as eBay focused on its core businesses. Further, PayPal’s number of transactions and payment volumes were enhanced over the period, which was a result of product development and consumer awareness.

For the future

eBay expects to scale up its commerce volume to $300 billion by 2015. The company’s mobile segment experienced a growth rate of 90% by gaining 3 million new customers. Yet earnings are expected to grow at a lower rate with the weakening of the European and Korean currencies. eBay and PayPal expect the mobile-commerce business to execute $20 billion in transactions this year.

The company plans to take up a re-imaging program by opening up a 24/7 shop-able store and earn from its latest partnership with Kate Spade Saturday. With its latest venture like the "eBay now," enabling delivery of goods to the doorstep in an hour, the company intends to be a leader in the commerce world. It plans to extend PayPal, which recently decided to wave transaction fees for deals up to $20,000 until January 2014. eBay is working towards extending its latest search engine Cassini, which performed exceptionally well in North America.

The company sees omni-channel commerce, mobile, and data as the upcoming areas of focus, and plans development in these segments. eBay continues to increase its global reach by adding eight new countries to its global shipping program. The company divested sites like rent.com and is focused on improving its financial flexibility by funding Bill Me Later loans. But eBay should be aware of its competitors like Amazon.com (NASDAQ: AMZN) and Overstock.com (NASDAQ: OSTK).

Stiff competition

Amazon is a serious threat that eBay needs to be aware. Amazon has been heavily investing in its business at the cost of earnings, which is evident from a rise of 22% in revenue in the recent quarter to $15.7 billion. Although the company took a net loss of $7 million, that is a result of its recent investments in the business. It is investing heavily in new warehouses to get closer to its customers and reduce its shipping costs. Amazon is on the path of turning itself into a broader technology company offering consumer gadgets like mobile devices and cloud-computing services.

To counter Amazon, eBay had to adjust its seller fee structure earlier this year. Amazon charges an average of 12% for every transaction, but eBay's move earlier this year looks to undercut Amazon by keeping seller fees in the 4% to 9% range.

While this is a good strategy to compete with Amazon and keep sellers on eBay, it might have a negative bearing on earnings in the future and lead to margin compression.

Overstock.com is another company that has an online marketplace.The company has been moving aggressively into the space of Amazon and eBay. It recently cut the prices of books to levels 10% below Amazon. The company slashed prices on more than 300,000 titles, and this might lead to more heated competition in the space.

Also, a glance at Overstock.com's growth rate for the next five years reveals a whopping expectation of 24% annual earnings growth. So it shouldn't be a problem for investors to pay 31 times earnings for this company even if it trades at a higher multiple than eBay, since eBay's expected earnings growth of 15% for the next five years is lower than Overstock's. 

Conclusion

eBay, with its new retail interface and prompt delivery service, aims to be the leader in the e-commerce world. The company is taking up constant site development programs in order to deliver full customer satisfaction. With success in eBay Enterprises and Marketplaces, the company continues to earn from its settled business and expects to accomplish its goals in the near future.

It is facing tough competition in the market but looks to count on PayPal and in-store payments to perform even better. So investors should look beyond the short- term weakness and focus on the long term since eBay is still a solid company with growth ahead.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.



ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. 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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