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Investment Overview for eBay (NASDAQ:EBAY)
Below are key drivers of eBay's value that present opportunities for upside or downside to the current Trefis price estimate for eBay:
- eBay Transaction Take Rate: We currently forecast the take rate, eBay's commission on items sold, to decrease from about 8.4% in 2014 to 7.9% by the end of the our forecast period. There would be a 5% upside to our price estimate if the take rate were to increase to 9% instead.
- Marketplaces EBITDA Margin: We currently forecast marketplaces margin to increase marginally to about 42.5%. However, there could be more than 10% upside to our price estimate if margins rise much faster to 52%. On the other hand, there could be a 5% downside to our price estimate if margins were to fall to 36% by the end of our forecast period.
- Annual Number of Payments per PayPal Account: We currently forecast that the average number of payments per PayPal account will surpass 32 by the end of our forecast period. There could be 10% upside to our price estimate if this figure increases to 40 instead. On the other hand, there could be 5% downside to our price estimate if payments per PayPal account remained at current levels.
- PayPal EBITDA Margin: We currently forecast PayPal EBITDA margin to marginally increase from about 24.8% in 2014 to 26.2% by the end of our forecast period. There could be a 5% downside to our price estimate if margins were to fall back to 2011 levels of 22.6%.
For additional details, select a driver above or select a division from the interactive Trefis split for eBay at the top of the page.
eBay is known for operating the online marketplace eBay.com. The company's marketplace is where third-party buyers and sellers can transact in a variety of products including clothing, electronics, media, collectibles, automobiles and many other types of merchandise.
In addition to eBay.com, the company operates other online commerce platforms such as Half.com, Rent.com, Shopping.com, and classifieds websites. eBay also makes money through its global payments platform called PayPal. PayPal enables enables secure, easy, quick, and cost-effective transfer of payments online.
The payment services arm PayPal will be spun off from eBay in 2015. We believe this move will create positive value as both segments face unique competitive challenges, and a separation will allow them to better align their strategies, capital allocation, and cost structure. We expect the two companies to largely maintain their synergies post the spin off as well.
Additionally, the company is also exploring a partial or complete sale or IPO of its enterprise business due to lack of synergies in this segment with eBay’s other businesses.
We estimate PayPal to be one of the most valuable segments for the company because of the following reasons:
PayPal's Rapid Growth Is Expected To Continue
PayPal's revenues have grown at an average annual rate of about 21% for the past three years (2011-2014) and we expect the segment to continue growing in high double digits in the near term. Our expectation is supported by PayPal's efforts to look beyond eBay for revenues. The company has been rapidly expanding its presence offline through mobile apps meant to facilitate cash-less transaction at physical retail outlets. PayPal’s mobile volume from third-party sites has now surpassed its volume from eBay, implying growing popularity across all e-commerce platforms.
Global Expansion Potential
PayPal currently has only limited global presence. In most countries, it is still associated as a payment means on eBay. Efforts similar to the ones underway in the U.S. can see PayPal beat our projections and continue at its current revenue growth for several years down the line.
Growth In Global E-Commerce Volume
eBay's marketplaces business is growing at a healthy pace due to the growth in global e-commerce volume and the company's continued site improvements. Going forward, eBay can complement its efforts and maintain the momentum by better leveraging social networking platforms and expanding in emerging markets. According to Forrester Research, the online retail sales in the U.S. are expected to grow at a CAGR of 9.5% over the next few years, from $263 billion in 2013 to $414 billion in 2018.
Focus on Increasing Conversion Rate
Conversion rate is a key focus area for eBay, as it seeks to increase the success of sellers in converting listed items to sold items. eBay has implemented a number of features to increase the conversion rate on marketplaces and has launched a revamped website. The new website interface makes it easier to browse through the selection and integration with the mobile platform means that the user can continue shopping through their mobile devices. These efforts have resulted in active user base growing by 14% in 2013 and 21% in 2014. We expect the growth to continue in the short term.
Growing PayPal User Base
PayPal users will continue to grow as eBay continues to integrate Paypal into its adjacent marketplaces platforms such as Shopping.com and Rent.com. The increased penetration of PayPal on third party merchant platforms will also help as eBay increases its focus on SMEs.
We expect the rapidly growing mobile payments market to contribute significantly to PayPal's growth in terms of total payment volume and other usage metrics. The company is promoting mobile transactions as an alternative to payment by cards through its mobile app. The service works through the PayPal app that customers can use to check-in to the store. PayPal has partnered with point of sale technology companies such as MICROS, Island Pacific, Kounta and Vend and will soon add more retailers and hospitality partners into the mix.
The Marketplace Segment Is Facing Short-Term Headwinds
The year-over-year growth rate in the marketplace segment came down from 11% in Q1 2014 to 9%, 6% and 1% in Q2, Q3 and Q4 respectively, as traffic declined due to security breach that happened in May 2014. The company had asked all its users to change their passwords as a safety measure – this led to a slowdown in buying activity as some users did not change their passwords but exercised caution. Changes in Google SEO algorithm also weighed on the segment during the past two quarters.
Results in this segment are expected to get worse in the near-term before showing improvement in the latter half of 2015. Over this period, the company will have to incur higher expenses on sales and marketing, which will weigh on its profitability.
Increasing Payments Competition
The competitive landscape for mobile and online payments is fast-changing considering the entry of newer players such as Apple Pay and Alibaba. Moreover, Google Checkout, and credit card merchants will limit eBay's ability to increase revenues by limiting its commission on PayPal transactions ("take rate").
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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