PayPal Carries eBay’s Earnings In The First Quarter

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eBay (NASDAQ:EBAY) posted 4% revenue growth to $4.5 billion in Q1 2015, which came in slightly ahead of market expectations. Excluding currency headwinds, the revenue growth was higher at 9%. This performance was driven by solid growth across the payments business, as the marketplaces segment continued to be beset by various challenges. In addition, the company’s non-GAAP operating margin increased by 10 basis points annually to 27.0% in Q1 2015 owing to cost-cutting measures.

Going forward, we expect continued momentum in the PayPal business to be partially offset by slight weakness in the marketplaces segment. Though the marketplaces segment showed some signs of stabilization during Q1 2015, we think it could take a few more quarters before the challenges completely wear-off in this segment. Additionally, currency headwinds are expected to have a much larger impact on the marketplaces segment.

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Solid Growth At PayPal Drove Earnings During The First Quarter

PayPal reported strong growth during the first quarter of 2015, as its net total payment volume (TPV) and revenue surged by 18% and 14% respectively. This was driven by 3.6 million new active account additions and 26% increase in merchant services TPV. In contrast, eBay TPV fell by 1% during the quarter. High growth (in the triple-digits) in the Braintree business and an increased proportion of larger merchants drove the growth in merchant services volumes. Mobile payments transactions continued to outperform and their share in overall transactions increased to around 30% during Q1 2015. [1]

We expect net transaction revenues in the payments business to rise at over 15% during 2015. Additionally, margins are expected to increase in this segment owing to recent cost-cutting and restructuring measures. Longer-term, we estimate PayPal to continue to see healthy growth over our forecast horizon, fueled by rapid growth in the online and mobile payments market, coupled with PayPal’s leading position in the market. However, rising competition in the mobile payments industry from players such as Apple Pay, Samsung Pay and Google Wallet represents a threat that could potentially impact PayPal’s growth. We will continue to closely monitor the success of other payment platforms (such as Apple Pay) to model their impact on PayPal’s future growth.

Marketplaces Segment Continued To Under-Perform But It Is Showing Signs Of Stabilization

During Q1 2015, eBay’s marketplaces segment continued to face some of the challenges pertaining to last year’s security breach and the Google Panda update, which impacted traffic levels on the platform. Marketplaces’ gross merchandise volume (GMV) and revenue decreased by 2% and 4% year to year, resepctively, during the quarter. The strengthening of dollar also significantly impacted results in this segment. Excluding currency headwinds, the global GMV and revenue rose by 5% and 3%, respectively. Though global auctions GMV fell by 12%, fixed price GMV rose by 10% in currency neutral terms. However, some signs of stabilization were also seen in the segment as growth in international GMV and sold items accelerated by one point against Q4 2014 levels to 7% and 9% respectively.

eBay is taking several measures to bolster growth in this segment such as structuring product listings into catalogs, diversifying traffic sources to include social and messaging platforms, enhancing category focus, and optimizing product experiences. However, we expect these measures to take a few more quarters to yield results and, hence, we think demand could remain subdued in this segment in the near future. Over the long-term, we expect growth in this segment to somewhat lag the overall e-commerce market, as we expect the competition to intensify in the future. Increased competition from global retail giants such as Amazon, Alibaba, Wal-Mart, etc could weigh on eBay’s growth over the coming years.

We are in the process of revising our $67 price estimate for eBay’s stock.

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Notes:
  1. eBay’s (EBAY) CEO John Donahoe on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 22, 2015 []