- eBay reported a decent quarter (slight miss on revenue but earnings met expectations).
- The company has responded to competitive threats aggressively by mentioning that its own NFC payment service that will soon be launched and increasing marketing spend in the Marketplace segment.
- Outlook for the next quarter slightly missed expectations.
- However expectations over a spin-off offset the negatives from the most recent quarterly earnings announcement.
eBay (NASDAQ:EBAY) reported a fairly solid quarter. However, marketplace volume could have been better, and the change in Google’s search algorithm along with the recent hacking incident has had a negative impact on traffic growth. Meanwhile the payment business continues to contribute majorly to eBay’s revenue growth. The stock trades at an extremely low valuation when compared to peers (Amazon, and Alibaba).
Amigobulls eBay stock analysis looks into eBay post the latest quarterly numbers. A video review on eBay post the latest numbers can be watched below.
eBay Q3 Earnings Results
eBay reported revenue of $4.35 billion in Q3 2014, which came in slightly below expectation of $4.37 billion (revenue grew 20% YoY). Also, non-GAAP EPS came in at $.68, which beat street estimates of $.67. The slight beat in earnings came from better cost controls, which was driven by less G&A expenses over the prior year.
The total payment volume, and merchandise volume have trended higher. However, merchandise volume growth fell short of expectations as search algorithm trends along with the recent hacking incident weighed in on GMV (gross merchandise volume) growth.
According to John Donahoe (CEO of eBay) and Bob Swan (CFO of eBay):
Slowing traffic growth has delayed the modest recovery we expected during the second half. And to get back on track, Devin Wenig and his team are moving decisively, aggressively managing costs and redeploying savings into marketing to drive traffic and enhance the brands. FX neutral GMV grew 7%, which decelerated 1 point due to pressure from lower levels of traffic resulting from the May cyber-attack and Google SEO algorithm changes. Fixed price, which now represents 79% of GMV, grew 15%, while auction growth declined 7%.
While marketplace struggled through the quarter, PayPal reported fairly reasonable rates of growth, and Bill Me Later (PayPal’s lending business) has exhibited both volume growth, and better margins due to lower loss rates. PayPal’s credit portfolio has grown to $3.5 billion, and the net charge –off rate has declined to 5.3%, which has resulted in a risk adjusted margin of 16.8%.
However, beyond the lending business, PayPal transaction payment volume has accelerated which was partially driven by BrainTree, mobile transaction growth, and additional marketing. However, due to cost increases (transaction expenses and loss rate), and lower profit margins at Brain Tree, the transaction margin declined from 65.1% to 62.8% sequentially.
Total transaction payment volume grew by 29% year-over-year, and the revenue contribution from the segment has increased to $1.95 billion. The company has plans of entering into the NFC payment space. The company wasn’t anticipating such rapid adoption of NFC payment technologies. However, with Apple’s announcement of Apple Pay, offline payments may represent an opportunity for PayPal. However, PayPal will have to compete for transaction volume with Apple, and it’s not clear how well margins will hold-up.
According to John Donahoe (CEO of eBay):
As you know, PayPal has always been sort of technology agnostic around how a consumer wants to pay. And as you said, for quite a while we thought NFC was not going to be -- get very fast adoption. Now with the recent industry changes, with localization, I think that will be accelerated. Although it’s important to understand, accelerated may be from a three to five-year horizon to a one to three-year time horizon.
eBay’s saving grace in the earnings conference call was the continued reiteration of splitting the company up to leverage synergies, but allow for focused growth initiatives unique to the separated entities. Outlook came in at non-GAAP EPS of $0.88-$0.91. The average analyst estimate for Q4 EPS is $0.91. Therefore, it’s highly likely that eBay will just barely meet consensus estimates. Furthermore, there are no notable catalysts that will drive revenue and earnings growth (over the short-term), as acquisitions, meaningful acceleration in share buybacks, or rapid cost cutting is extremely unlikely at the present moment.
eBay contained some of the long-term risks with more aggressive marketing, and development of an off-line payment service in coordination with Samsung. The growth rate has decelerated in the marketplace segment, and while PayPal remains a bright spot, margins haven’t been able to hold-up. Despite these shortcomings, eBay is a well balanced growth investment with a healthy balance sheet, and trades at a 25 P/E multiple. By conventional standards that’s a high P/E ratio, however, when compared to peers like Amazon, Visa, and MasterCard the valuation is somewhat reasonable.
Going forward, eBay should have some upside left, as growth is both sustainable and predictable. The premium paid on earnings and sales may improve following the spin-off. Furthermore, both businesses have a durable advantage as they have an established ecosystem and a significant installed base. While competition has heated up in both the marketplace space (Amazon 3P), and online payment space (Apply Pay), the company has responded aggressively with higher marketing spend, strategic partnerships, programs, and small-scale acquisitions.