eBay Earnings Preview: Marketplaces Segment Could Continue To Drag Earnings

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eBay (NASDAQ:EBAY) is scheduled to report its Q4 2014 earnings on Wednesday, January 21st. Though we expect its payments division PayPal to report strong growth, its marketplaces segment is likely to show sub-par growth. This, in all likelihood, could be due to the continued impact of the security breach and changes in the Google SEO (i.e., Search Engine Optimization) algorithm that hit eBay earlier this year  and led to reduced traffic levels on eBay’s sites. We also expect eBay to face profitability pressure during the fourth quarter due to a surge in sales and marketing expenses to curb the fall in traffic on eBay’s marketplaces.

Over the longer run, we believe Bay has a strong business model with high margins and cash flows, and could gain from the rapid growth in the global e-commerce and online payments market. We expect the spin-off of PayPal to be beneficial for both the resulting companies, as they are increasingly facing a unique set of challenges and opportunities. We will be closely tracking the earnings call to know more about the strategic direction each company could take post the spin-off later this year, and how their synergy is expected to persist in the long-run.

Our $67 price estimate for eBay’s stock, represents near 20% upside to the current market price.

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Marketplaces Segment Will Continue To Under-Perform

Beset by traffic-related challenges, growth in the eBay’s marketplaces segment subsided during 2014. Its sales growth slackened from 11% in Q1 2014 to 9% and 6% in Q2 and Q3, respectively. A security breach hit eBay’s marketplace earlier this year, due to which the company had asked all its users to change their passwords as a safety measure. This led to a slowdown in buying activity as some users did not change their passwords and exercised caution. In addition, changes in Google’s SEO (search engine optimization) algorithm also adversely affected traffic on eBay, as the company was punished for a lack of quality content on seller-generated listings. SEO management is tricky for eBay since there are millions of seller-generated listings on its platform, which leads to a large amount of unstructured data — overcoming this challenge involves manual processes, which could take a few more quarters to show results.

Most likely, these challenges weighed on the segment’s results in the fourth quarter as well. According to same store sales data compiled by ChannelAdvisor, eBay’s sales under-performed the broader e-commerce market during the last three months, with same stores sales coming at 4.4%, 9.8% and 5.8% during October, November and December, respectively. This compared to Amazon’s same stores sales of 32.4%, 35.7% and 21.8% during the same respective months. While the baseline year-over-year growth for the overall U.S. e-commerce sales during the recent holiday season (spanning November and December) was pegged at 16% by ChannelAdvisor, eBay’s performance was recorded to be much lower at 7.3% during this period. [1] The sales from auctions are declining year-over-year, and the rise in fixed-price sales is also lagging the overall e-commerce market by a large extent.

With the expected spin-off of PayPal business later this year, investors will be wondering how eBay aims to accelerate its growth in the marketplaces segment going forward. Sales increase in this segment has remained sub-par for the past few quarters, and the company will have to take some concrete measures to show it can compete more effectively in the e-commerce market. eBay’s management had reported that they will focus on certain key customer segments, the over-haul of their SEO strategy, and the enhancement of sales and marketing efforts, so as to mitigate the impact of these recent challenges.  We will looking for updates regarding this strategy during the earnings call.

PayPal Segment Will Show Strong Growth

We expect PayPal to carry eBay’s fourth quarter earnings, with solid growth in active account additions and total payment volume. Overriding the weakness in the marketplaces segment, payments segment’s revenue and total payments volume (TPV) rose by 19% and 28% respectively during the nine months ended September 2014. We expect the high demand in this segment to persist in the fourth and upcoming quarters as the online payment market is seeing huge growth, with PayPal maintaining a leading position in this market. PayPal’s advancements on the mobile platform will also help it gain share in the rapidly growing mobile payments market. Paypal’s mobile payments volume surged by 72% during Q3 2014, accounting for around 20% of the total payment volume. Product innovations (such as One Touch payments), along with high growth within the recently acquired subsidiary ‘Braintree’ (a leader in mobile payments space), will also drive results during the fourth quarter.

We expect the payments business to gain significantly from the spin-off, as it will allow the standalone business to navigate the rapidly changing competitive environment much more flexibly. We think the separation from eBay could also throw open the opportunity of PayPal partnering with other leading giants such as Google, Alibaba, Facebook, etc. The increasing proportion of merchant services in net TPV (as compared to on-eBay net TPV) is another positive that makes PayPal less reliant on eBay for its growth.  It grew to 73% of the total during the nine months ended September 2014.


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Notes:
  1. December 2014 SSS ChannelAdvisor Same Store Sales (SSS) for eBay, Amazon, Search, CSE and other e-commerce channels, Channel Advisor, January 7, 2015 []