Although eBay (NASDAQ:EBAY) beat consensus estimates, the stock fell slightly in after-hours trading due to a disappointing outlook. The company’s Q3 2013 results reflected strong growth across its payments and marketplaces businesses. However, management warned that U.S. e-commerce growth is slowing down and that it expects the full year results to fall near the lower end of its guidance. It appears that consumer confidence in the U.S. has taken a hit amid the recent government shutdown and debt ceiling concerns. There is a good chance that the holiday season will be weak, which may impact eBay’s results in the fourth quarter. However, we expect the situation to improve going forward as the company’s core businesses remain strong and overall e-commerce volumes are poised for healthy long-term growth.
Our price estimate for eBay stands at $54.3, implying a premium of more than 5% to the market price.
The Slowdown In U.S. E-commerce Growth Will Be A Minor Roadblock
Last quarter eBay raised concerns about the macroeconomic headwinds in Europe and Korea. While the business in these regions seems to be stabilizing, the company is now wary of slowing e-commerce growth in the U.S. As a result, management is being cautious about its approach to the holiday season. We believe that some of this can be attributed to the recent standoff within the government and debt ceiling concerns. The macroeconomic situation in the country is still not very sound and eBay could feel the impact in the near term. However, given that the company operates in an industry which is witnessing explosive growth across the globe, the risk from short-term fluctuations is small.
According to eMarketer’s September report, overall e-commerce retail sales in the U.S. are expected to reach $260 billion in 2013, representing close to 16% growth over the last year.  This is still a fraction of the country’s total retail sales, which indicates large room for growth.
Mobile Continues To Be A Key Growth Driver
The momentum in eBay’s marketplaces and payments (PayPal) businesses continued in the third quarter. While marketplaces grew by 12% due to an increase in the number of active users, PayPal saw a jump of 18% in revenues as the company added another 5 million active accounts.  A majority of this growth can be attributed to eBay’s continued efforts in the mobile space.
The mobile revolution has penetrated many aspects of our lives, and mobile devices are becoming the new focus of advertisers, marketers, retailers and payment service providers. Customers can now walk into a retail establishment and use their smartphones to make purchases and find the best deals by comparing prices at other stores. Many players including credit card companies, banks, Internet companies and retailers are fighting to get a share of this growing market. The competitive advantage will come from technology, security, user experience and integration across devices. eBay has done well in this regard, and rolled out several upgrades for its mobile app in the third quarter which were essentially directed towards increasing user convenience. The company’s marketplaces business acquired 2.4 million new users through mobile in Q3 2013, accounting for roughly 36% of the customers gained. 
Emerging Markets Will Be More Important Than Ever
As the U.S. business slows down, eBay is likely to push for international expansion in BRIC (Brazil, Russia, India and China) countries. Foreign retailers are showing interest in these regions due to an increasing market size, a growing number of aspirational buyers, rising personal income and lack of organized retail penetration. The company officially launched its localized website in Russia in Q1 2013 and a full marketing campaign, which includes TV, was introduced in Q2. PayPal launched in Russia in the third quarter and within the first couple of weeks, close to 2,000 merchants applied for Russian PayPal merchant accounts.  The service already has 1 million active accounts in the country. In India, eBay has lowered its fee to attract sellers and has invested $50 million in Snapdeal.com, India’s largest online marketplace.Notes:
- Mobile Devices to Boost US Holiday Ecommerce Sales Growth, eMarketer, Sept 5 2013 [↩]
- eBay’s Earnings Release [↩]
- eBay’s Q3 2013 Earnings Transcript [↩] [↩]