Will eBay Face Heat From Alibaba?
eBay (NASDAQ:EBAY) has long dominated the U.S. online marketplace business. But with Alibaba’s (NYSE:BABA) recent successful IPO, will the e-commerce giant feel the competitive pressure? There are clear indications that Alibaba, which once shied away from competing against eBay, is becoming strong enough to challenge the company on its own turf. It not only has the financial muscle, but also some competitive advantages in terms of pricing and transaction fees which could be lucrative to both merchants and buyers. Moreover, the recent security breach has dented eBay’s reputation to some extent. Here are some reasons why eBay needs to be cautious going forward.
Our price estimate for eBay stands at $67, implying a premium of little under 30% to the market.
See our complete analysis for eBay
Alibaba Is Gaining Financial Muscle
Alibaba’s business model is lean, and the company has been gaining financial muscle due to strong growth in revenue and a rapidly increasing EBITDA margin (earnings before interest, taxes, depreciation and amortization). We note that Alibaba’s revenue has jumped from $1.57 billion in calendar year 2010 to $8 billion in calendar year 2013 primarily driven by expansion in China. The increase in the number of active buyers, as well as growth in average spend per buyer, has fueled this growth. During the same period, Alibaba’s EBITDA margin increased from 16.7% to 58.8%. The gain in operating leverage is huge due to the low incremental cost of expanding business. The company also raised additional cash of more than $8 billion in its recent IPO in the U.S. Considering its dominance in China, we believe that Alibaba is likely to use this additional capital to expand its business overseas, and it has more than enough cash to do so, considering that its business model is not capital intensive.
Alibaba has mentioned that the U.S. is among its key foreign markets, others being Russia and Brazil. With its recent IPO, the company has already made its presence felt in the country and will leverage this opportunity to market itself more. Over time, we believe that eBay will feel the impact of Alibaba’s growing influence.
Alibaba’s Pricing Advantage
Considering that most of the goods on Alibaba’s marketplaces are sourced directly from China, there is inherent price advantage for buyers. AliExpress is witnessing growth in the number of buyers from countries such as Russia, Brazil and the United States, which is driving strong growth in the platform’s gross merchandise volume (GMV). This suggests that there is an uptick in demand for Chinese products in international markets. Alibaba is highly likely to build upon its growing stronghold in these markets, and that means the expansion of business in the U.S. This is likely to cause some concern for eBay.
On AliExpress, Chinese wholesalers and manufacturers sell merchandise to global consumers. Alibaba primarily earns revenue on AliExpress through transaction fees, which is typically 5% of gross merchandise value (GMV) settled via Alipay. As it turns out, this fee is cheaper than what eBay charges its merchants and may act as a competitive advantage for the company as it tries to woo U.S. sellers. For 2013, we estimate that eBay’s overall take rate stood at around 8.1%.
Security Breach And Related Revelations Can Shake Customer Faith
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. Moreover, BBC recently revealed that eBay knew about the loophole in its security but did nothing to plug it. [2] This revelation, provided it is correct, can cause a further dent in eBay’s reputation and may encourage customers to shift to other online platforms such as Amazon and AliExpress.
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- eBay’s SEC filings [↩] [↩]
- eBay security flaw has existed for months, BBC, Sept 19 2014 [↩]