eBay (NASDAQ:EBAY) posted double-digit growth for Q4 2013 in both of its key segments, marketplaces and PayPal, which are equally valuable and together constitute about 70% of the company’s value, according to our estimates. Despite less-than-expected e-commerce growth during the holiday season in the U.S., eBay more or less maintained the year-over-year growth that we have seen in the last few quarters. The broader picture looks positive and the full year performance suggests that the company is positioned strongly to leverage the global growth in the e-commerce market.
Another interesting thing that came up during the earnings announcement was activist investor Carl Icahn’s proposal of spinning off PayPal to unlock shareholder value. However, eBay’s management stressed that it is in the interest of shareholders for eBay and PayPal to stay together. We don’t expect the company to act on this proposal anytime soon, but it underscores the incredible growth that PayPal is witnessing globally.
We are currently in the process of reviewing our price estimate for eBay in the light of recent earnings, and will have an update ready soon. Our current price estimate for eBay stands at $54, which is roughly in line with the market price.
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eBay Marketplaces Business Grew Faster Than The Industry
eBay’s marketplaces revenues were up by 13% in the fourth quarter, which is same as the growth for the full year.  This demonstrates the consistent and stable run up in the segment’s sales driven by the continued growth in the e-commerce market, eBay’s marketing, its efforts to improve the payment system and site design, and overseas expansion. The number of active users were up by 14%, implying a slight decline in the average purchase per user which is nothing to be concerned about at this point. The average payment per user is likely to come down as the company expands because the late adopters are likely to be less savvy buyers.
The growth sustained despite a slowdown in the U.S. e-commerce market. eBay’s warnings during its last earnings announcement regarding a slowdown in the U.S. e-commerce growth materialized to some extent during the fourth quarter. 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. But the fact that eBay attained a higher growth rate than the overall market, implies that it took some share from other e-commerce retailer. That’s definitely good news for the investors, but it remains to be seen whether the company can repeat this performance in the coming quarters.
Will Spinning PayPal Off Unlock More Shareholder Value?
PayPal gained roughly 5.2 million active accounts in the fourth quarter of 2013, which was higher than any quarterly gain we saw during the year.  The total payment volume was up by 25%, but the take rate declined slightly, resulting in revenue growth of 19%.  This was still in line with the annual growth in PayPal’s revenues. A lot of this can be attributed to the service’s increasing penetration on eBay and the continued improvement in the system to increase customer convenience.
The company plans to step up the investment in PayPal in 2014, which may affect its cash flows in the short run. However, the move could help the segment sustain, or even accelerate its growth globally. The market for online payment systems is getting increasingly competitive and slacking on a good run is the last thing that eBay will want to do. A significant portion of the investments made in PayPal are being funded through cash flows generated from the marketplaces segment. In addition to this, PayPal owes a notable portion of its success to its integration with eBay. These synergies can be disturbed or lost if the company was to spin off PayPal as a separate unit, which is what active investor Carl Icahn is proposing.Notes:
- eBay’s SEC filings [↩] [↩] [↩]
- Discounts drive U.S. holiday retail growth: ShopperTrak, Reuters, Jan 8 2014 [↩]