With the Quantitative Easing of $85 billion per month, money comes in very cheap to companies and the benefit is then transferred to the end user luring them with offers and credits. Let us examine the case of EBay (NASDAQ:EBAY), who through its acquisition of Bill Me Later, has started providing short term credit at the point of sale to its buyers on its eCommerce platform.
eBay gives an option to defer payments/take credit when they buy things online. The transaction is done through a chartered financial institution-WebBank, and eBay then ‘Purchases’ the loan from the bank. Thus, eBay is the indirect ‘Lender’ and in the one bearing the ‘credit risk’. It will boost sales, no doubt, but is it an effective use of cash for an e-commerce company, given the additional financial risks borne by the company?
Cash Flow from FED to Online Shoppers
eBay raised $ 3 billion debt in third quarter of 2012, even though it had cash balance of $5.7 billion as on 30th June 2012. Cash balance have been thus increasing since 2012. This cash was used for funding Bill Me Later receivables, which in my opinion, isn't an operating capital expenditure for the company. This led to the daily sales outstanding (DSO) jumping to 283 days (for Q3-2013), which is far higher than any of its competitors, including Amazon. Even though eBay has a solid cash balance, and therefore the ability of absorb risks associated with Bill Me Later, but in our opinion, the debt raised and the cash balance could have been put to better use to boost its existing ecommerce segment or payments solution.
eBay Cash Flow Analysis
Source: Ebay Sec Filings
*Includes customer and loan accounts for PayPal, including Bill Me Later.
Bill Me Later works like most credit card companies, except for the fact that they give credit per transaction rather than a dollar amount per user, based on their credit history. It’s mainly useful for buyers, who have maxed out their credit cards during holiday season or otherwise. Currently, the default percentage for Bill Me Later purchases are less than 5% per year, traditionally lower than other credit card companies, but risks seem high for a company mostly associated with retail, and not hedged against rampant defaults during period of economic crisis. eBay is also fighting a law suit filed against Bill Me Later, alleging its relationship with the chartered financial institutions and eBay’s Bill Me Later acting as the true lender to customers. If the lawsuit is successful, eBay will have to pay substantial damages and will thus affect its value to an investor.
Having said all that, I see huge growth opportunity in eBay’s payment segment, due to integration of acquisition of Braintree and huge growth resulting out of m-commerce. eBay has consistent revenue growth of above 14% since last 3 years, and at a current last-twelve months PE ratio of 24.53, the stock seems to be fairly-priced. Still, there are hidden risks behind its financials, and owing to the recent economic downturn witnessed in 2008, offering loose credit to buyers seems to expose eBay to additional risks.
For more detailed analysis, refer to our earlier articles on eBay:
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