The Industry to Watch Out For

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There is no doubt that with every passing day, more and more operations of the retail and banking business are shifting online. The company that I believe can extract the most benefit from this shift is eBay (NASDAQ: EBAY). The company’s strong performance is well replicated in its stock price increase by over 35% in the last year. Let’s see what we can expect with eBay’s second quarter earnings report.

Revenue estimate

According to the analysts at Yahoo! Finance, eBay is expected to post revenue of $3.89 billion, which, if achieved, would be a 14.5% growth from a year ago figure of $3.40 billion. The company itself estimated its revenue in its first quarter earnings call to be $3.80 billion to $3.90 billion. So, meeting the analysts’ estimates should be well within the comfort zone of the company.

Earnings estimate

In the last four quarters, the company has been consistently beating the consensus estimates by a cent and giving investors small positive surprises for over a year now. For the current quarter, the consensus estimates an earning figure of $0.64, which would be a 14% hike in EPS compared to the same quarter last year.

The analysts estimate higher earnings than the company’s management expectation of $0.61 to $0.63 as reported in their last earnings call. In the first quarter, eBay’s GAAP operating margin increased to 21.3% from 19.9% from the same period last year. As the margin is improving, achieving the targeted earnings won’t be much trouble for the company.

Strong business

eBay is a platform that connects buyers and sellers, hence it does not need to maintain huge inventory and thus saves huge warehousing costs along with other infrastructure and staffing expenditures. The company charges a commission for using its platform which accounts for its revenue. The company’s business has two main segments: the Marketplaces segment and the Payment segment.

The Marketplaces segment had a strong first quarter this year with net revenue surging 13% to $2 billion - driven because of improved customer experience, increased mobile commitment, and robust performance in the clothing, accessories, and home and garden categories.

The margins from the Marketplaces segment improved 340 basis points to 42.1% in the quarter, mainly due to efficient marketing expend. The company has increased investments in the second quarter, but still expects 38% to 42% margin from the segment, which would only improve when the capex finally starts delivering.

The e-payment king

PayPal has grown profoundly and is well ahead other players who provide similar payment platforms. Last year, PayPal’s active account growth increased to 15%, and in all had 123 million digital wallets. PayPal mobile handled $14 billion in payment volume in 2012, and is expected to handle $20 billion in mobile payments volumes this year, making it clearly evident that the company is all set to be the future of mobile payment. Further, as per Morningstar, over 60 out of 100 online retailers in the U.S. accept PayPal, and, with time, more merchants and retail stores should join PayPal, making it stronger.

Future growth

eBay has penetrated the U.S. market and has its presence in more than 40 countries. E-commerce is not that recognized of a concept in other countries, which should eventually change radically in the subsequent five years with the growth of middle-class population in the emerging countries.

The company understands the importance of global market and has thus acquired 2dehands.be and 2ememain.be, two of the biggest online sites in Belgium. It has also entered in a deal to buy SnapDeal.com, India's newest online marketplace, substantiating eBay's intentions, which is to become a leader in e-commerce in emerging markets.

Competition

Amazon.com (NASDAQ: AMZN), is the true competitor of eBay because it is also used by top retail stores in the U.S. for their online transactions. Over the years of exquisite performance, Amazon has gained the trust of the top players in the industry.

Amazon, too, acknowledges the importance of international expansion and is entering new markets, Amazon Prime and Amazon Web Services being the perfect example of its diversification projects.

Amazon, over time, has taken away many of the traditional business from the brick and mortar retailers. In the span of last ten years, the company has diversified into different segments such as music, games, e-readers, etc. to broaden its horizon.

Overstock.com (NASDAQ: OSTK), another online retailer, has come a long way from where it started, and it currently offers personal items, electronics, cars and many other items. Though Overstock.com is very small compared to its competitors, it’s a growing company and thus has a lot of potential to deliver for its shareholders.

The company turned around well in 2012 after a bad patch in 2011, and currently has a strong debt free balance sheet with a large amount of cash. It is expected to grow at a rate of 34% in the coming five years as online retail business grows. Furthermore, Overstock can be genuinely benefited, if it expands internationally through organic and inorganic growth projects, as almost its entire revenue comes from the U.S. currently.

Final words

eBay’s core business and mobile innovation is expanding annually at a decent pace, which will make the company’s future growth expectations realizable. Further, the $10 trillion commerce market gives the company a lot of opportunities for growth. eBay’s commerce volume of $49 billion in the first quarter means that the company is heading in the right direction towards its $300 billion target of commerce volume annually by 2015. Lastly, the online market is expanding, which will not hamper the co-existence of both the titans Amazon and eBay.

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tarun bachhawat 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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