- Amazon and Facebook are entering the online payments business.
- PayPal is tough to dislodge but eBay will be wary.
- eBay is attractively priced at current valuations.
In the last month or two, e-commerce major eBay(NASDAQ:EBAY) has faced its fair share of challenges due to data theft issues eroding user confidence. Next, eBay had to contend with a search listings thrashing following Google’s (NASDAQ:GOOG) search algorithm update. While these factors could put some pressure on eBay’s retail business in the short term, the recent developments pose a fledgling threat to PayPal, its payments business.
As per recent announcements, arch rival Amazon (NASDAQ:AMZN) and social networking giant Facebook (NASDAQ:FB) have decided to enter the online payments business. What’s more interesting is that eBay’s PayPal chief, David Marcus is scheduled to move to Facebook. However, the saving grace might be that he won’t be leading their payments business. The coming quarter or two will prove eBay’s resilience, or the lack of it, through these challenging times.
Facebook’s Potential in e-money
About a fortnight ago we evaluated Facebook’s potential in the e-money or online payments. The company has filed an application for an e-money licence in Ireland. A regulatory approval of the same will enable it to roll out its e-money/online payment services throughout the European Union.
Facebook’s platform is increasingly being used to facilitate e-commerce. Multiple stores and individuals leverage Facebook’s large user base to gain visibility and sell goods. If Facebook manages to garner 5% of the total e-commerce market in Europe alone, the opportunity is worth $20 billion.
PayPal is deeply entrenched into the online payments business and it will be difficult for any competitor to dislodge it from its dominant position. However, if Facebook can incentivize the use of its payment platform, this won’t be great news for PayPal.
Further, Facebook has a distinct advantage in its mobile presence with over 1 billion mobile Monthly Active Users (MAUs). Even after doubling since 2012, in 2013, mobile payment volume accounted for only about 15% of PayPal’s total payment volume. In contrast, about 78% of Facebook’s total users are active via mobile devices. If Facebook expands into payment services globally, the move could hurt PayPal in the long term.
Amazon’s Rather Late Entry Into Payments
Amazon is scheduled to enter the payments business by managing subscription payments for start-ups to begin with. Going by the way Amazon does business, it may not be too long before it decides to scale things up. Given the success eBay’s PayPal has seen over the years, one would wonder why Amazon has held back for so long.
However, now is not a bad time for it to roll out a typically high margin payments business. Especially since investors seem to be gravitating towards profitability, which isn’t Amazon’s forte to say the least.
Amazon definitely has the size and the scale to worry eBay if the former’s payments business picks up and starts driving payments on the e-commerce portal. As per our estimate, Amazon payments could mop up about $600 million on its e-commerce portal with a take rate that is 1% lower than that of PayPal.
Why PayPal Is So Important To eBay!
PayPal accounts for about 40% of eBay’s revenue and is currently growing at much faster pace when compared to the rest of eBay’s business. In Q1 2014, PayPal clocked $1.8 billion in revenue, growing at 20% Y/Y vs eBay’s overall growth of 13.7%.
Not only does PayPal drive eBay’s growth, it also represents a segment of the business that is complementary to its core business and fits very well into its revenue model. For instance, PayPal drives payments for about 55% of the transactions on eBay. It will be difficult for competitors to substitute PayPal in the online payments business in general. Further, competitors will take time to develop the kind of synergy that has developed between eBay and PayPal.
That said, Amazon and Facebook are not the kind of competitors eBay will want to take lightly.
eBay Stock Valuation
Earlier this month we covered eBay stock valuation in detail and not much has changed since then. At a stock price of $48 a share, eBay trades at price sales ratio and price/adjusted earnings multiples of about 3.8 and 21.3 repectively. At these valuations, eBay is way more attractive than its peers in the online retail segment.
Further, it is much more profitable than Amazon which enjoys a high premium in terms of its P/E based valuations when compared to eBay. The target for eBay will be to increase its payments volume over mobile devices. Until competitors’ payments business gain significant traction, we would continue to view eBay as an attractively priced means of gaining exposure to the online retail and payments businesses. Is eBay stock a buy or sell? We have a hold rating on eBay stock.
To see eBay’s latest stock price movement, click here (NASDAQ:EBAY)