eBay (NASDAQ:EBAY) will release its Q4 2013 earnings on January 22. We expect the marketplaces business to benefit from the continued growth in the online retail sales despite a slight slowdown during the holiday season. As far as PayPal is concerned, the brand is an established one in the online payment systems market and there is a good chance that that the momentum will continue. The broader picture is that eBay is positioned strongly, even though there are some short term concerns about e-commerce market growth. There is huge potential to expand in Asian and Latin American countries, which will of course not come without its challenges. Efficient delivery mechanisms, improvement in the user interface and payment methods are some of the factors that will draw large number of shoppers to online platforms such as eBay.
Our price estimate for eBay stands at $54, implying a slight discount to the market price.
Paypal Will Continue To Expand Customer Base
PayPal is as important a business for eBay as marketplaces, and constitutes close to 37% of its value. The service has been gaining roughly 5 million new active accounts each quarter, and operated around 137.5 million such accounts at the end of Q3 2013. The segment’s growth is highly tied to the growth of the e-commerce market as consumers adopt convenient online payment methods. In this regard, PayPal has been testing a new system which will allow shoppers to complete the transaction on merchant website rather than being redirected to PayPal website. It also tied up with epay recently, which is a subsidiary of Euronet Worldwide, to offer gift card content on its digital gift store.
The improvement in the payment mechanism, the focus on mobile, and key partnerships will continue to drive PayPal’s growth. The total payment volume continues to increase, despite a decline in the average payment size. The penetration rate of PayPal on eBay is growing and the company is promoting mobile transactions as an alternative to payment by cards through its mobile app. Overall we believe that segment’s revenue growth will exceed that of eBay marketplaces.
E-Commerce Grew, But Slightly Below Forecast
eBay’s warnings during its last earnings announcement regarding a slowdown in the U.S. e-commerce growth materialized to some extent. While the holiday retail sales continued to grow for the fourth consecutive year, online retail sales grew by 10% during the period of November-December.  This was below 14% growth forecast by comScore and 15% growth forecast by e-marketer. Some of this stemmed from the fact that retailers had to give deep discounts in order to drive sales. This could imply that eBay’s marketplaces business could see a slight slowdown in its growth for Q4 2013, compared to what we saw during the first nine months of the year.
Nevertheless, the broader picture is still positive. We expect online retail sales to grow rapidly, both in the U.S. as well as in several key international markets such as Europe, India and China. eBay is interested in China as there is a huge accumulation of wealth in the country, and Chinese consumers are becoming an increasingly important part of the global economy. eBay can add 10% to its value if it is able to increase its gross merchandise volume by another $50 billion over our current expectations. A lot of this could come from expansion in international markets.Notes:
- Discounts drive U.S. holiday retail growth: ShopperTrak, Reuters, Jan 8 2014 [↩]