eBay’s Performace in Q3 2013
In the recent quarter results, eBay topline revenue was $3.9 billion up 14% Y/Y with EPS of 54 cents up from last year’s EPS of 45 cents, a growth of 17% Y/Y. The results beat Zack’s analyst expectations but failed to impress investors owing to the low guidance given by the company for the fourth quarter of this year. The company expects fourth quarter revenue between $4.5 billion to $4.6 billion.
eBay’s performance in comparison to Amazon
eBay’s revenues have grown consistently at an average rate of 21% since inception generating an average operating margin and net income margin of 24% and 19% respectively. In comparison, Amazon’s operating and net income margins are 3.7% and 2.7% respectively, despite a revenue growth rate of 30%. This consistent attractive growth rate of eBay is impressive to investors, as shown in the chart below.
eBay’s Segmental Breakup
eBay functions mainly two segments: PayPal and e-commerce Marketplace. Let’s take a closer look at the two of them. Marketplace contribution to eBay’s revenues dropped from 62% in 2010 to 53% in 2012 whereas PayPal segment contribution went up from 38% to 40% for the same period and the newly acquired GSI business contributed 8% in 2012.
eBay’s Segment-wise Revenue Breakup
Comparing Paypal with its competitors
PayPal’s is the key contributor to eBay’s revenues, generating 45% of the company’s revenues in Q3 2013. Its consistent double digit revenue growth is propelling eBay’s revenue growth. It’s the market leader in payments processing, with its competitors lagging far behind. PayPal will face competition with the new launch of Google Wallet in the future.
We view eBay to be best positioned to benefit from the accelerating growth in mobile usage. This is expected to benefit its payment segment more than marketplace, as PayPal has a greater market share in mobile than online. Particularly after the acquisition of Braintree which will be completed in the fourth quarter of 2013, PayPal is expecting to generate $20 billion in payments volume through mobile by the end of 2013. Paypal in Q3 2013 reported revenues of $1.6 billion with operating profit of $368 million.
Comparing eBay Marketplace with Amazon
Marketplace, which contributes 55% of the eBay’s revenues, stands second in the e-commerce platform, next to Amazon. In Q3 2013 the company generated revenues of $2.02 billion with an operating profit of $789 million as compared to Amazon’s $17 billion revenues. An interesting factor in the comparison of the two is that Amazon recognizes revenue on dollar value of product sales whereas eBay recognizes revenues on transaction fees and advertising fees on each product sold. For comparison, eBay’s Gross merchandise volume (GMV) was $18 billion .
Marketplace witnessed a growth of 12% Y/Y in Q3 2013, compared to 25% Y/Y growth of Paypal. The company has also hinted at a softer guidance of this segment in the upcoming holiday season, which had the stock price falling almost 4% to levels of $50. Going forward, we expect Paypal which contributed 45% last quarter, to take over Marketplace in revenues and continue to generate high growth.
In order to best provide perspective to eBay’s valuation, we compare the relative valuation ratios with its larger competitor in ecommerce Amazon.
|eBay (EBAY)||Amazon (AMZN)|
|Price to Earnings ratio (P/E)||23.9||1294.9|
|Price to Sales ratio (P/S)||4.2||2.4|
|Price to Book ratio (P/B)||3.1||19.3|
At a LTM P/E of 23.9, and Zacks estimated forward PE ratio of 22.17, eBay is cheaply priced in comparison to Amazon and to the internet industry. Though over last one year eBay’s price has remained at same levels and has not given any returns to investors, keeping in view company’s future outlook, especially on Paypal, consistent high revenue growth rate with good profits, and lower PE ratios, we at Amigobulls are bullish on the future prospects of eBay. The share price closed at $50.39 on Nov 20, 2013.
To see Ebay’s latest stock price movement, click here (NASDAQ:EBAY)