EBay Delivers Mixed Results, Shares Pop

  • eBay missed estimates on revenue, but beat EPS expectations.
  • eBay's stock popped post earnings and could continue to move higher.
  • Why should eBay shareholders hold eBay post the PayPal IPO? Read on.

Global commerce company, eBay (NASDAQ:EBAY), has reported its second quarter fiscal 2015 results just a day before the company officially spins off its payments business, PayPal (Pending:PYPL). eBay results were mixed: the company managed to beat on bottom line expectations but failed to meet top line projections. eBay reported that it realized revenue of $4.4 billion and non-GAAP EPS of $0.76 excluding the contribution of eBay Enterprise unit which the company is in the process of selling for about $900 million. Consensus analysts’ expectations called for revenue of $4.5 billion and EPS of $0.73. The results represented revenue growth of 7% and EPS growth of 9%. EPS on a GAAP-basis clocked in at $0.51, up 128% Y/Y.

eBay shares had started selling off slightly on Wednesday probably due to low expectations by investors. But the shares popped close to 7% after the results were finally announced, a clear sign that the investing world was pleased with the company’s results. eBay shares are up 17.7% YTD.

eBay 5-Day Share Returns

eBay-20
Source: CNN Money

Marketplace Disappoints Again, PayPal Shines

As widely expected, eBay’s Marketplace extended its streak of negative growth while PayPal delivered mid-teen growth. Marketplace realized revenue of $2.11 billion, or (4)% Y/Y growth on Gross Merchandise Volume, or GMV, of $20 billion, or (2)% growth.

PayPal reported net revenue of $2.26 billion on Total Payments Volume, or TPV, of $66 billion. This represented 14% Y/Y growth in net revenue and 18% Y/Y growth in TPV. The results by PayPal were also an improvement compared to the first quarter when the payments unit grew its net revenue by 14% and TPV by 16%. Marketplace’s GMV has continued to be hampered by currency headwinds as the dollar continues to strengthen against many major international currencies. GMV in the U.S. grew 2% on a GAAP-basis while international GMV was down 5%. On a constant-currency basis, however, international GMV was up 8%.

But, it was not all doom and gloom at Marketplace. Looking at the take-rates of both segments, it’s important to note that Marketplace’s take-rate improved while PayPal’s remained unchanged. Take-rate refers to the commission charged by eBay on transactions on its platform. Marketplace’s take rate spiked to 10.25%, up sharply from 8.28% during the previous quarter, while PayPal’s take-rate remained unchanged at 3.43%. This snapped a long streak of falling take-rates by Marketplace, and played an important role in improving eBay’s profitability.

eBay 21
Source: TechCrunch

Improved Marketplace take-rate means more dollars trickle to eBay’s bottom line, which is important now that eBay will no longer enjoy PayPal profits after the spinoff.

Forward Guidance

eBay issued the following full-year for both Marketplace and PayPal:

  • eBay revenue to grow 3%-5% on an FX-neutral basis with GAAP earnings of $1.40-$1.45. The mid-point of the EPS represents a large improvement compared to the previous year when GAAP EPS clocked in at ($0.03). This was in part due to the $3 billion tax hit that eBay took to repatriate cash that had piled up abroad.
  • PayPal revenue to grow 15%-18% on an FX-neutral basis while GAAP earnings are projected to clock in at $0.89-$0.95.

Why It Makes Sense to Hold eBay Stocks Post Spinoff

eBay shareholders will receive one PayPal share for every eBay share they hold. PayPal shares started trading on an ‘‘when issued’’ basis on July 6 at a price of $36.48 that valued the company at $44 billion, or about 60% of eBay’s market cap. The valuation implies that PayPal shares will sport a PE ratio of around 40, or twice the PE reading of eBay. If eBay shares were to trade down to fully reflect the loss of income after the spinoff, they would trade at $40.36. Thus an eBay shareholder would be left holding two shares worth a combined $76.84, implying a net gain of 17.24%. It’s however, not very likely that eBay shares will plunge by such a large margin, especially now that investors seem happy with the company’s improved take-rate. eBay shares could continue to gain if it can continue improving its take-rate and its GMV.

eBay recently launched ‘‘Promoted Listings,’’ that focusses more on mobile and a Cost-per-Sale, or CPS, business model. The new model favors sellers since it does not use the traditional Cost-per-Click model where sellers only pay for ads when they lead to a sale.

eBay 22
Source: Media Post

This new model gives eBay an edge over rivals such as Etsy (NASDAQ:ETSY) which use the CPC model and can result in improved GMV rates. With these new developments, eBay shares might have significant long-term potential.

Article cover image licensed from - Copyright: mikewaters / 123RF Stock Photo

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