The founding father of online auctions, eBay (EBAY: Charts, News, Offers) posted a surprising Q3 profit of $432 million, earning 0.40 per share on revenue of $2.25 billion, beating the analyst consensus of 0.37 per share on revenue of $2.18 billion, thanks mainly in part to PayPal’s hefty gains. It also offered rosy guidance, expecting Q4 EPS to come in between 0.45 and 0.48, slightly above the analysts’ expectations of 0.44 per share. To top it all off, eBay announced a massive $2 billion stock buyback. For a stable blue chip and one of the most recognized brands in the world, the stock trades at a discounted forward P/E of 16.26, and offers new investors an opening to build a position.
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eBay’s business is split into two main segments – Marketplaces and Payments. Its Marketplaces segment consists of its flagship online auction site eBay.com, secondary tickets marketplace StubHub, online shopping comparison site Shopping.com, apartment listing website Rent.com, its fixed price media marketplace, Half.com, as well as online classifieds. The Payments segment consists of online payment services PayPal and Bill Me Later, which are both incorporated into its Marketplace sites. In 2009 the company sold its majority interest in Skype, a move that was criticized at the time but in retrospect helped streamline the company’s main interests and reduce costs. In June 2010, eBay acquired RedLaser, a barcode scanning application for iPhone, as well as related technology from Occipital. These purchases were clearly intended to begin building a foundation for smartphone shopping and price comparisons, which would blend smoothly into its Marketplace and Payments system.
PayPal, eBay’s primary online payment system with which payments are easily distributed and received via e-mail, was purchased back in 2002 for a lofty $1.5 billion. This investment paid off big this quarter and is set to overtake eBay.com as the leading revenue source for the company. PayPal had 90 million active accounts worldwide by the end of the quarter, with a consistent growth of over a million accounts monthly. For the fourth consecutive quarter, Merchant Services net total payment volume increased 40% year over year, signifying a considerable increase in activity in active accounts. PayPal is eBay’s vehicle into the newly evolving world of express payments via smartphones. Its smartphone application, which allows for money transfers on a mobile platform, has proved wildly popular. By introducing smartphone check deposits, which utilize the smartphone camera and previously mentioned barcode scanning technology, it received $100,000 in new deposits during its first 36 hours of operation.
The company has highly aggressive competitors in its Marketplace segment, the most prevalent of which is Amazon.com (AMZN: Charts, News, Offers). Superstores such as Best Buy (BBY: Charts, News, Offers), Wal-Mart (WMT: Charts, News, Offers) and Target (TGT: Charts, News, Offers) have also set up shop online, following in eBay’s Internet shopping footsteps. Specialty sites such as online diamond retailer Blue Nile (NILE: Charts, News, Offers), online auto retailers Autobytel (ABTL: Charts, News, Offers) and Autonation (AN: Charts, News, Offers) as well as variety e-commerce retailer Overstock.com (OSTK: Charts, News, Offers) all offer distinct services which can potentially chip away at eBay’s customer base. Moving forward, the company faces several headwinds down the road. Decreasing buyer satisfaction, an inevitably with a business as large as eBay’s, has been growing, with complaints rising over its comparatively unsophisticated search engine, unscrupulous sellers prowling the marketplace with scams, fakes and bait-and-switch tactics and complaints about the double charge levied upon sellers by both eBay and its subsidiary PayPal, which charges 2.9% when receiving payments. As a result, many sellers have begun setting up proprietary websites off-site in order to side step e-Bay/PayPal charges, opting instead to use eBay’s search engine as a promotional tool to link to their websites. These websites often utilize Google (GOOG: Charts, News, Offers) Checkout or Amazon’s Marketplace system, which both offer superior web integration and fraud protection in comparison to PayPal. Lastly, eBay’s revenue stream from online advertising from partners such as Yahoo (YHOO: Charts, News, Offers) and Google have begun to cannibalize its own sites, often redirecting shoppers out of the site to do their shopping elsewhere.
The company has launched eBay Express in an attempt to address many of the aforementioned concerns. The search engine is more optimized with standardized requirements for sellers in an attempt to capture the newest, most popular merchandise in a more streamlined system for buyers. It also launched the Feedback 2.0 system, which is designed to weed out shady sellers faster and with more anonymity. eBay has also launched MyWorld, which provides seller information and blogs, in an attempt to connect social networking and sales, and Deal Finder, an optimized search engine designed to find closing auctions and product reviews. While all of these are positive signs of the company evolving, these changes run the risk of fragmenting the company’s focus and causing brand confusion and redundancies. The company would do well to vertically integrate these features into its main site to maintain its current customer base and attract new buyers and sellers.
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eBay Benefits from PayPal – PayPal fast becoming eBay’s profit engine
Ebay Sells $1.5 Bln Of Debt In Three-part Offering
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
As an eBay seller, I can say that the new policies meant to crack down on scamming sellers actually hurts more honest sellers than it does scammers.
Those who scam will just pick up another user name and continue doing what they do. Those who run legitimate businesses get binded from doing business by buyers who do not pay attention to what they are buying.
eBay makes its money from the sellers, and offer them nothing in return.
Nice write up that hits the nail square on the head. More and more users have jumped ship and gone out on their own (due to ebay’s Draconian policies). Ebay’s answer to the falling user base has been to raise fees. Eventually it will hit a point where the user pool is so crushed that you’ll even start to see paypal transactions slow (due to the shrinking of the core marketplace). The other huge factor in 2011 is this tax id number that paypal must collect going forward on $10,000 or 200 transactions per year through it. All that’s going to happen there is your going to see paypal users base grow, but what it really will be is users making multiple accounts in order to stay under the 200 transaction per account limit. I suspect you’ll see even less US based sellers on ebay once IRS gets involved (as we all know half the sellers on there don’t file).