eBay Earnings Preview: What We Are Watching
eBay (NASDAQ:EBAY) will release its Q2 2014 earnings on July 16. We expect robust growth driven by continued expansion in Europe, growing e-commerce volume, the positive impact of a new delivery system that allows customer to collect their purchases from a nearby store and PayPal’s ever-growing customer base. The company’s stock price has come down in recent months owing to some negative incidents ranging from security breach to management shakeup. We believe that eBay will take this opportunity to dispel investors’ doubts, offer a clear roadmap and discuss corrective measures it has taken. The growth in PayPal’s customer base and eBay’s mobile commerce volume will be key metrics to watch out for, as they can dictate most of the market’s reaction.
Our price estimate for eBay stands at $60, implying a premium of about 20% to the market.
See our complete analysis for eBay
E-Commerce Volume Will Continue To Grow
eBay will benefit from the growth in total commerce volume, mobile commerce volume and the increasing number of active PayPal accounts. The secular trend of consumer shift to the Internet for shopping will continue to offset any short term weakness that the business might experience. According to eMarketer’s forecast, global business-to-consumer e-commerce sales are expected to jump by roughly 20% in 2014, amounting to $1.5 trillion. [1] This expected growth is higher than what the industry saw last year, and much of it will be driven by the continued uptake in mobile usage in emerging markets, expansion into new regions and advancements in payment and shipping services.
Given that the Eurozone and the U.K. are gradually coming out of recession, we expect eBay to benefit from some economic tailwinds as demand improves. Germany and the United Kingdom together accounted for about 49% of eBay’s international revenues in 2013, and close to 26% of its global revenues. Both markets grew at a similar rate of 15-16%, whereas the company saw its revenues from the rest of the world jump by 13%. We believe that eBay’s second quarter results will substantiate its focus on expanding its international presence and laying greater emphasis on PayPal’s growth in emerging markets.
However, eBay Will Need To Revive Investor Confidence
Few recent incidents have hit eBay’s stock hard, and the company is likely to leverage the occasion of its earnings announcement to rekindle investor faith. Earlier this year, eBay announced its decision to repatriate foreign cash. U.S. companies typically park a large chunk of their cash balances overseas to avoid repatriation related taxes unless they really need it. eBay’s move signaled that the company was badly in need of funds, to the point that it didn’t mind paying a huge amount of taxes on it. This made investors a little wary. Additionally, eBay’s online security was breached in a cyber attack which compromised user information including names, usernames, passwords, email addresses, phone numbers and dates of birth. The fact that eBay was a specific target negatively impacted the company’s image and public relations.
Adding to this, the shake-up of PayPal’s top management wasn’t comforting to investors either. The departure of PayPal’s president came as a surprise to investors, shaking their confidence in the company’s fastest-growing business segment. Compared to the marketplaces segment, which saw growth of roughly 12% in 2013, PayPal increased its revenues by 18.5% during the same year. eBay has long emphasized the advantage of PayPal and marketplaces business working together and the synergies that arise from it. The management shake-up raises doubts on the ability of the two units to work coherently.
We expect eBay to offer a clear business road map and to discuss both the effectiveness of corrective steps and how competent PayPal’s management is now.
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