Despite Some Macroeconomic Headwinds, eBay Will Show Strong Growth
While we expect eBay’s (NASDAQ:EBAY) payments and marketplaces businesses to remain fundamentally strong, the economic headwinds in Europe and Korea may impact Q3 2013 results. The company’s stock slumped after it lowered its full year outlook last quarter due to the same reason. The visitor statistics for eBay.com and PayPal.com suggest that there was a slight decline in the web traffic on these sites during the third quarter. This could weigh on the company’s profits and reinforce our aforementioned expectation. [1] However, this is likely to be a temporary disturbance in an otherwise immaculate growth that the company has witnessed over the past few quarters. Our price estimate for eBay stands at $57, implying a premium of more than 5% to the market price.
PayPal has been the star performer, adding active accounts all over the world as e-commerce gains global traction. The service is benefiting from increased merchant coverage and higher share of checkout. This means that more customers are buying goods and services through PayPal and many merchants believe that integrating PayPal has been helpful in acquiring new customers. eBay has a strong market position and growing global e-commerce volumes will help it sustain its growth in the long term.
The company expects earnings growth of 15% to 18% over the next three years (including 2013) with revenues expected to jump by almost 70% during the same period. We believe that this may be achievable despite the temporary and minor setbacks it may face in the second half of 2013.
Check out our complete analysis of eBay
PayPal Will Continue To Add Customers
We estimate that PayPal constitutes close to 45% of eBay’s value. Its growth has primarily come from the increase in the number of active accounts, which stood at 132 million at the end of Q2 2013. A growing number of people are buying online, and are now shopping more frequently than ever. Although the average payment size has come down in recent years, it has been more than offset by the increase in the number of payments. In other words, average spend per account has gone up as PayPal continues to find support from an increase in its penetration rate on eBay.
Mobile is going to be one of the key growth areas for PayPal, and the company is promoting mobile transactions as an alternative to payment by cards through its mobile app. Consumers can now walk into a retail establishment and use their smartphones to make purchases, and find the best deals to compare the prices with the other stores. The mobile revolution has penetrated many aspects of our personal lives, and the mobile devices are becoming the new focus of advertisers, marketers, retailers and payment service providers. A lot of players including credit card companies, banks, Internet companies and retailers are fighting to get a share of this growing market. The competitive advantage will come from technology, security, user experience and integration across devices. To remain competitive, PayPal has partnered with point of sale technology companies such as MICROS, Island Pacific, Kounta and Vend and will continue to add more retailers and hospitality partners into the mix. eBay expects PayPal to do $20 billion of mobile commerce and payments volume in 2013. [2]
Omni Channel Initiatives & Emerging Market Expansion Will Lend Support
eBay’s marketplaces business will benefit from international expansion in BRIC (Brazil, Russia, India and China) countries. Foreign retailers are showing interest in these regions due to an increasing market size, a growing number of aspirational buyers, rising personal income and the lack of organized retail penetration. The company officially launched its localized website in Russia in Q1 2013 and a full marketing campaign, which includes TV, was launched in Q2. In India, it lowered its fee to attract sellers and recently invested $50 million in Snapdeal.com, which is India’s largest online marketplace. The move coincided with Amazon’s launch of its Indian website and showcases the growing interest of online retailers toward the Indian market.
Additionally, eBay has been taking several initiatives to enable merchandise sales through multiple channels (omnichannel capability) including mobile, desktop and offline The company’s RedLaser mobile app allows consumers to make price comparisons on the go. eBay Enterprise partners with retailers who are interested in adopting omnichannel approach, the Magento ecommerce platform enables shopping features through multiple channels, and PayPal is already doing its part in facilitating online and offline payments for retailers.
Our price estimate for eBay stands at $57, implying a premium of more than 5% to the market price.
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Notes:- eBay Inc (EBAY) Q3 Earnings Preview: A Shaky Quarter Coming?, iStockAnalyst, October 9 2013 [↩]
- eBay’s Q2 2013 Earnings Transcript [↩]