Why This Company Will Lead in Mobile Payments

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

The markets can punish even the best of companies.

Last week eBay (NASDAQ: EBAY) reported earnings that missed on the top and bottom line. Net income came in at $822 million for the quarter, while revenue missed at just under $3.9 billion. Earlier this year, eBay laid out aggressive forecasts, seeking to enable some $300 billion in online commerce by 2015.

The auction and payment company noted that its full year earnings might fall toward the bottom of its EPS range of $2.21-$2.26 per share, sending shares down over 7%.

Running the numbers

The Fool believes stocks are pieces of living, breathing businesses. Naturally, Foolish investors are most interested in the next decade, not just one quarter.

So let’s take a look at how eBay performed in the second quarter and reconcile it with long-term trends. eBay revealed that it:

  • Grew commerce volume 21% - Total enabled commerce volume came in at $51 billion. This includes all of eBay’s businesses – PayPal, Marketplaces, and eBay Enterprise (formerly known as GSI), an outsourcing business.
     
  • Grew revenue 14% - Total revenue was up 14%, while free cash flow rose 12% year-over-year to $658 million.
     
  • Added 4.7 million PayPal users – Its payments business is its fastest growing segment, adding 4.7 million users on the quarter for 17% year over year growth.

Why eBay’s miss is forgivable

Setting high standards can lead to defeat when you fail to live up to perfection. However, there is ample reason to suggest that even if eBay cannot meet its $300 billion goal, it can deliver stellar long-term returns for investors.

Here are the metrics investors should watch carefully:

  1. Transaction revenue – PayPal is immensely profitable for eBay. In the second quarter the company generated transaction revenue of $1.475 billion for growth of 21% over the year ago period. The company has several initiatives to grow total payment processing revenue. It recently partnered with Outerwall (NASDAQ: OUTR) to allow customers to deposit and withdraw cash from their PayPal account at its Coinstar kiosks. The partnership is mutually beneficial as it drives traffic to Coinstar kiosks and makes PayPal just as useful as any other savings account. Outerwall is a value stock worthy of investor attention, as it rolls out new innovative kiosks to drive future growth.
     
  2. Marketplace volume – eBay’s online Marketplaces are red hot. The company reported the addition of 3.6 million new active users around the globe for annual growth of 14%. Its core US and International Non-Vehicles segments produced year over year growth of 13% combined. American growth was 16% while international gross merchandise volume rose 11% year over year. One point of weakness is the company’s vehicles business – eBay Motors – which saw 11% year-over-year declines in gross merchandise volume. The segment is a laggard in part because of high used car values and rapidly-rising new car sales. At $1.8 billion in sales this quarter, eBay motors is dwarfed by the performance of its non-vehicle segments, which processed sales of $18.29 billion. A change to its fee structure has not adversely affected volumes or revenue, with revenue growing in-line with merchandise volume. 

Why eBay is an emerging leader

eBay’s diversified businesses are what make it one of the best plays in e-commerce. The company does not hold inventory; its key businesses (Marketplaces and Payments) can grow without significant investments, and it effectively earns a royalty on each dollar moved through eBay.com and PayPal.

The company has a formidable moat that protects itself from the competition, and it’s making in-roads to take down leaders like American Express (NYSE: AXP) and MasterCard (NYSE: MA) in offline transaction volume. A partnership with Coinstar gives its customers an “ATM” through which they can turn PayPal balances into cash. Meanwhile, eBay is investing to take share of offline payment volume.

The company reports that it now has over 2,000 cafes, restaurants, cinemas, and even taxi cabs accepting mobile payments via PayPal in Australia and the UK. CFO Robert Swan says it’s all about removing customer “pain points,” like waiting for a bill at a restaurant or in line at a local café. If PayPal can reduce transaction times for consumers and businesses alike, it can steal share of offline payment volumes traditionally handled by MasterCard and American Express, which own their own payment networks, but offer little in the way of an online payment platform like PayPal.

Discover (NYSE: DFS) intelligently decided to partner with PayPal in an agreement that could eventually bring PayPal payments to more than 7 million offline retailers. Discover earns a network fee on each transaction, bolstering profits from its network and insulating itself from the risk and capital expenditures necessary to build out its own mobile payments platform.

Of all the companies interested in mobile and online payments, eBay has the clear lead. There’s little reason to believe double-digit top-line growth will end any time soon, and at 17 times forward earnings, investors are getting a bargain bin price on a company with market leadership.

I’m adding a 5-year long on eBay on CAPS. While I don't know what the next quarter will bring, I'm confident in the long-term potential of PayPal to drive high-margin business at double-digit annual growth.

 

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends American Express, eBay, and MasterCard. The Motley Fool owns shares of eBay and MasterCard. 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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