eBay Earning Preview: Expecting Marketplaces Segment To Under-Perform

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eBay (NASDAQ:EBAY) is scheduled to report its first quarter earnings for 2015 on Wednesday, April 22nd. We expect its payments division PayPal to carry earnings during the quarter as the marketplaces segment is likely to show sub-par growth. We believe the latter will continue to be impacted by headwinds such as last year’s security breach and Google Panda update that have contributed to reduced traffic levels on eBay’s marketplaces. On the other hand, we believe PayPal’s business will be driven by high growth across the Braintree business and mobile payments.

In terms of profitability, we expect a surge in sales and marketing expenses during the first quarter, as eBay will enhance measures to increase traffic on its marketplaces. We will be closely tracking the earnings call to know more about the planned divestiture of enterprise business, the progress with restructuring efforts, as well as the expected spin off of PayPal later this year.

Our $67 price estimate for eBay’s stock, represents near-5% upside to the market.

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Marketplaces Segment Could Continue To Drag Earnings

Sales growth in the marketplaces segment slackened to 1% during the fourth quarter of 2014, as compared to 11%, 9% and 6% growth during the first three quarters respectively. This is mainly due to last year’s security breach and Google Panda update, which impacted traffic levels on the platform. Moreover, the addition of lower priced items, a change in user demographics, and the strengthening of the U.S. dollar also impacted eBay’s business. We think these headwinds will weigh on the segment’s results during the first quarter of 2015 as well.

According to data by ChannelAdvisor, eBay’s performance came in below the overall e-commerce market during the first quarter, with same-stores sales increase being seen at 6.8%, 5.1%, and 7.3% during January, February, and March respectively. This compared to 24.8% (average) and 15% growth for Amazon and the e-commerce market respectively during the same period (as per Channel Advisor). [1] While eBay auction sales declined significantly during the past three months, fixed-price sales also under-performed the broader e-commerce market.

In an effort to boost business,  the company has prioritized on its marketing thrust and Search Engine Optimization (SEO). And it has enhanced its focus on core shoppers and its deals business to reinvigorate growth within this segment.  We will be looking for updates regarding these initiatives during the earnings call.

PayPal Will Carry eBay’s Growth During The First Quarter

Overriding the weakness in the marketplaces segment, the payments business recorded 18% and 24% rise in revenue and net total payment volume (TPV), respectively, during Q4 2014. We expect PayPal to report strong growth during the first quarter as well, with solid increases in account additions and TPV. Merchant services’ TPV could continue to see robust increase, owing to high demand in the Braintree business and an expansion in merchant coverage. Further, we expect mobile payments to rise rapidly and its share in total payments volume to surpass 20% during the first quarter.

We estimate that PayPal’s net transaction revenues will rise at about 14.5% annually over our forecast period, due to rapid growth in the overall mobile payments market coupled with PayPal’s leading position in the market. The expected spin-off of this segment later this year will further accelerate growth, in our view, due to enhanced management focus and flexibility to partner with other Internet players.

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Notes:
  1. March 2015 SSS ChannelAdvisor Same Store Sales (SSS) for eBay, Amazon, Search, CSE and other e-commerce channels, ChannelAdvisor, April 13, 2015 []