eBay: Payments and Marketplace have interesting growth prospects
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently eBay’s (NASDAQ: EBAY) PayPal announced its partnership with Discover (NYSE: DFS) following a recent partnership announcement by Square and Starbucks (NASDAQ: SBUX). This partnership will bring PayPal to more than 7 million offline merchants across the US (Discover has penetrated 95% of the U.S. market.). eBay’s management noted that PayPal will begin the rollout to the 1,500 large merchants provided by Discover from 2Q13 with the remaining merchants being rolled out over the course of the year. As the rollout would be without any incremental hardware or software, we believe that eBay can gain quickly gain market share and momentum with its offline expansion. Initially PayPal launched its offline initiative with Home Depot and 15 other retailers (detailed below). Furthermore, PayPal now has access to over 40 million payment terminals worldwide through the partnerships with three terminal providers- Verifone, Equinox, Ingenico.
eBay’s offline payments original Retailers| Source: Company Reports
We believe that the partnership with Discover will help PayPal increase merchant acceptance and Point of Sale (POS) manufacturer partnerships. PayPal offline could outstrip competition from Google (NASDAQ: GOOG) Checkout, Visa V.me, and MasterCard’s PayPass as increasing number of merchants start accepting PayPal. This POS opportunity might result in significant revenues for PayPal with an estimated TAM of over $8 trillion in TPV. While offline payments might have a lower overall transaction margin, we believe that these offline transactions would positively impact PayPal’s segment margin.
According to the recent SSS data released by Channel analytics Same Store Sales (SSS) for eBay increased by a record smashing 28.2 % YoY for eBay in July. The growth was mainly driven by a less than usual 1.1% YoY decrease in eBay auctions, a record showing 33.1% YoY increase in eBay fixed price segment and above seasonal 36% YoY growth in eBay Motors (P+A).
eBay record breaking SSS in July 2012| Source: Channel Analytics
We believe that the growth was driven by a free shipping facility (Fast and Free) rollout by eBay in October 2011 given the importance of free shipping for online shoppers.
Factors Influencing Total purchasing experience| Source: ComScore Research
The positive effects of FNF were clearly indicated by the Q2 data provided by Michael Jones (VP of Merchant Development) to Channel Analytics. The data suggests that 2Q12 saw 12.7 million FNF transactions by 6.5 million unique users. 10% of the total items viewed in Q2 were eligible for FNF showing the increasing popularity of FNF. We believe that the program is gaining high traction as the shoppers are getting more clarity about the delivery time with FNF (based on the location and the courier services data procured by eBay). As it doesn’t take much effort on part of the sellers to provide the consumers with this functionality, we believe that the service can gain considerable traction going forward and generate incremental revenues for eBay’s marketplace.
FNF Program by eBay |Source: eBay.com
Going forward, we believe that the back to school promos going on currently could act as a catalyst for eBay Marketplace for the rest of Q3. As eBay currently trades at a Forward PE of 17.2X, it is trading at a discount to Amazon’s (NASDAQ: AMZN) Forward PE of 101.08X and the competitors average multiple of 21.6X. With the continued growth in the Offline Payment segment and the continuous innovations in the Marketplace segment gaining traction, we maintain our buy rating on eBay.
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