eBay Is Missing Out On Big Growth In China
China’s e-commerce market is booming and eBay (NASDAQ:EBAY) is missing out on the opportunity primarily due to the strong dominance of local online retailer Taoabao. The company’s management acknowledges that there is a huge accumulation of wealth in the country and Chinese consumers are going to be an important part of the global economy in the future. Therefore, it is imperative for eBay, or any other online retailer, to establish a presence in the regional market. eBay’s international business has grown at a brisk pace, but the growth rate seems to have moderated in recent quarters and stands way below what China is seeing currently. Let’s take a look at eBay’s international performance so far and why tapping Chinese market needs to be one of the strategic goals for the company.
Our price estimate for eBay stands at $54, implying a premium of about 5% to the market price.
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eBay Hasn’t Done Bad In Terms Of International Growth
eBay’s international revenues jumped from $4.6 billion in 2008 to nearly $7.3 billion in 2012, registering a compounded annual growth rate (CAGR) of 12%.  Most of this growth came in the last two years when the figure for stood at 21.5%. While Germany saw a slowdown in the growth in 2012, other markets including the United Kingdom and the rest of the world continued to grow at 20%+ rate. Germany and the United Kingdom together accounted for over 48% of eBay’s international revenues in 2012, and close to 25% of its global revenues. Clearly, these two markets are very important for the company. During the first nine months of 2013, eBay’s international revenues surged 14.3%.
Given that the Eurozone and the U.K. are slowly coming out of the recession, we expect eBay to benefit from some economic tailwinds. The company recently signed a deal with Argos, a store chain in the U.K., to allow local shoppers to pick up their online purchases from eBay at local Argo stores. We believe that eBay will continue to focus on expanding its international presence and lay greater emphasis on PayPal’s growth in emerging markets.
eBay’s International Revenue Breakup, Source: SEC Filings
But China’s Market Is Simply Too Attractive To Ignore, And Could Speed Up eBay’s International Expansion
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. However, the company has had a difficult time making its mark in China, and pulled out from the local market in 2006. Local e-commerce sites Tmall and Taobao account for the bulk of the country’s marketplaces volume. Owned by Alibaba, these portals have grown their combined gross merchandise volume from RMB 16.90 billion in 2006 to more than RMB 1 trillion in 2012.  That’s almost 100% compound annual growth rate for a period of 6 years. In comparison, eBay’s gross merchandise volume has grown at a much slower pace, which is not surprising because it mainly operates in relatively mature markets of North America and Europe.
Compared to $157 billion of gross merchandise volume for Tmall and Taobao for the first 11 months of 2012, the figure for eBay stood at $75 billion for the full year. There is no doubt that China has emerged as the single most important market for e-commerce companies. However, given the strong foothold of local online retailers, eBay will not find it easy to gain share in the domestic market. In a recent interview with the Wall Street Journal, eBay’s management stated that it hasn’t given up on its ambitions in China and is trying to revive its local marketplaces business by focusing on certain niche product segments such as fashion, where Chinese consumers have more inclination towards western brands.
eBay can add 10% to its value if it is able to increase its gross merchandise volume by another $50 billion over our current expectations. We currently forecast this figure for eBay to increase from $75 billion in 2012 to $130 billion over the next six to seven years. This may be achievable given the strong e-commerce growth in China, provided that the company is able to compete effectively against the local online retailers. This incremental gross merchandise volume will imply another 70 million active users over our current forecast assuming that the average spend per user will not be meaningfully different. In reality, the figure is likely to be lower for Chinese consumers which indicates that eBay will need many more users in the country. It must be noted that the 10% upside estimate is just from the marketplaces business. The actual upside could be much more as eBay will also promote PayPal, which is equally important business segment for the company.
Submit a Post at Trefis Powered by Data and Interactive Charts | Understand What Drives a Stock at TrefisNotes:
- eBay’s SEC Filings [↩]
- Alibaba’s Tmall and Taobao ecommerce sites pass $157b in combined 2012 sales volume, thenextweb.com, Dec 3 2012 [↩]