eBay Earnings Preview: Paypal Will Carry eBay As The Impact Of Security Breach Continues To Weigh On Third Quarter Results

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eBay (NASDAQ:EBAY) will report its Q3 2014 earnings on October 15th. While we expect its payment division PayPal to perform well, marketplaces segment is likely to show sub-par growth as some early indicators suggest. This, in all likelihood, could be due to the impact of security breach that left many users wary of making purchases on eBay. The effect was clearly visible in the second quarter and is likely to trickle down to third quarter results as well. Besides this, we believe that the upcoming earnings conference call will focus not only on results but strategic questions as well. eBay’s recent decision to spin off PayPal in 2015 does beg a lot of questions around its future strategy and and the need to maintain a strong commercial agreement between the two companies. This becomes especially important considering Alibaba’s recent IPO and ambitions, as well as the upcoming launch of Apple Pay service.

Our price estimate for eBay stands at $67, implying a premium of little under 20% to the market.

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eBay’s Growth Will Reflect Security Issues, Will Remain Sub-Par

As was the case with eBay’s Q2 results, the impact of security breach will trickle down to the third quarter. In Q1 2014, the ebay’s marketplaces’ revenues increased by 11% compared to the same period a year ago. The year-over-year growth in Q2 declined to 9%, and remained flat sequentially. We believe that this was primarily due to a slowdown in buying activity from some buyers, in response to the company’s request that users change their passwords to preserve the security of their accounts. We suspect some users instead avoided usage of eBay’s platform, exercising some caution. The same store sales data compiled by Channel Advisors for eBay suggests that the growth remained subdued in July and August, but recovered to some extent in September. The same-store growth for the month of August stood at a mere 5.9% but increased to 8.9% in September. [1] The overall growth still remained below that for the e-commerce market and September was the first month to see an uptick since June. On the other hand, the figures for Amazon were much higher, which suggests that eBay is under-performing. The sales from auctions are down and the growth in fixed-price sales has also come down. With PayPal now separating from eBay, investors are likely to be concerned about eBay’s ability to compete in e-commerce market on its own.

PayPal Will Continue To Demonstrate Strong Growth

We expect PayPal to carry eBay with strong active account additions and total payment volume growth. The online payment market is growing rapidly and PayPal is a leading player in it. The company has been introducing some new features such as industry’s first ‘one-touch’ payment solution, introducing bitcoins as acceptable payment method for digital merchants, and tying up with Samsung to integrate its service in latter’s Galaxy S5 smartphone finger print reading technology. [2].  Interestingly, several of these innovations are brainchild of its acquired subsidiary Braintree. Considering that the landscape of online payments is evolving fast (Apple Pay is a recent example), PayPal will need to muster every bit of its intellectual capital to compete and stay ahead. Separating from eBay can give it more flexibility and speed to do so.

In Q2 2014, PayPal added more than 4 million active accounts and taking the total past 150 million. 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. As a result, PayPal’s transaction related revenues jumped by 18%, more than twice the growth rate for marketplaces segment. PayPal’s mobile volume from third-party sites has now surpassed its volume from eBay, implying growing popularity across all e-commerce platforms.

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Notes:
  1. Amazon, Google September Same-Store Data Is Upbeat, Investors.com, Oct 8 2013 []
  2. Apple Was Going To Partner With PayPal On Apple Pay Until It Found Out PayPal Was Working With Samsung, Business Insider, Oct 1 2014 []