PayPal Carries eBay’s Weight, Marketplaces Segment Will Bounce Back Soon
eBay (NASDAQ:EBAY) saw another impressive quarter despite the setbacks it has faced in recent times. The overall revenue growth remained solid. The slowdown in its marketplaces business was compensated by strong growth in the payments business, or PayPal. There was a slight decline in eBay’s operating margins but it appears to be a near term effect of costs related to a cyber security breach and investments directed at making the site more intuitive and user friendly. The key takeaway from the quarter’s result was that eBay’s marketplaces business is not performing as well as investors might have liked. While the impact of security breach will fade away with time, eBay will need to make efforts to revive the growth of this business to protect its stand alone valuation in case PayPal is spun off. While that’s not going to happen immediately, eBay is open to the suggestion and may consider it when it makes sense to do so. Nevertheless, we remain positive on the company’s overall prospects as secular trends remain strong and there is a lot of potential to expand in emerging markets.
Our price estimate for eBay stands at $67, implying a premium of about 30% to the market.
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PayPal Set The Tone For eBay’s Performance In Q2 2014
PayPal, as usual, was the star performer for eBay, adding more than 4 million active accounts and taking the total past 150 million. [1] This led to 29% growth in the total payment volume, with the total number of payments increasing by 21% compared to the same period a year ago. [1] As a result, PayPal’s transaction related revenues jumped by 18%, more than twice the growth rate for marketplaces segment. [1] This is especially encouraging considering the departure of a key executive from PayPal’s management team in the second quarter. PayPal’s mobile volume from third-party sites has now surpassed its volume from eBay, implying growing popularity across all e-commerce platforms.
Security Breach Affected Marketplaces Segment But The Situation Can Be Salvaged
The security breach that rocked eBay in the second quarter of 2014 had a slight negative impact on marketplaces segment’s growth. In Q1 2014, the segment’s revenues jumped by 11% compared to the same period a year ago. [1] The year-over-year growth in Q2 came down to 9%, and remained flat sequentially. [1] This can be attributed to a slowdown in buying activity from some buyers as the company had asked all its users to change their passwords. As it turned out, some of them did not, and stayed away from the platform exercising some caution. While this has damaged eBay’s reputation to some extent, the situation is salvageable. We expect the marketplaces business to get back on track by next year as eBay makes security enhancements, and brings back buyers to previous activity levels through specific marketing efforts. We estimate that eBay marketplaces constitutes roughly 40% of the company’s value. Even though PayPal is growing fast and compliments marketplaces business, eBay has kept an open mind to the suggestion that PayPal should be spun off, and this may become a reality at some point in this future. This implies that eBay will need to make efforts to accelerate the growth of its marketplaces business to ensure that its standalone valuation doesn’t suffer. At the moment, it appears that it is being masked by PayPal’s tremendous success.
We believe that eBay’s marketplaces segment will continue to benefit from the growth in total commerce volume and expansion on mobile. 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. [2] 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. In Q2 2014, eBay’s mobile volume jumped 68% with total cumulative app downloads hitting 260 million. [3]
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