eBay: Why Longs Should Not Be Spooked

| About: eBay Inc. (EBAY)

eBay's (NASDAQ:EBAY) forward thinking mindset has never been more evident than in the past few years and this trend still continues today with the announcement of Q1-2013 Earnings. The company, by a hair of $.01, continues its streak of now nine consecutive quarters of beating earnings. The stock however has taken a hit due to the squishy Q2-13 forecast of $.61-.63 Non-GAAP EPS compared to analyst expectations of around $.66 a share, due mainly to a weak euro and British pound and increased CAPEX. These forecasts spooked many investors today that perhaps the company's bottom line growth may be slowing and that the company won't be able to meet full-year targets. However I interpret this in the opposite direction. I believe ebay is not a company that is a penny wise and pound foolish, it is looking to sacrifice today to capture the growth it seeks for the future. Just look at the ambitious plans in its Analyst Day press conference (Analyst Day). I will discuss some of eBay's long-term initiatives and show you why I believe it is simply positioning for long-term growth.

"From an eBay Inc. perspective, we believe our addressable market has expanded and is now significantly larger, and we are increasing our investment to capture this growth opportunity." - CFO Robert Swan on guidance

2012 Q4 & Full-Year Review

EBay had a wonderful end of 2012 year quarter with Q4 revenue up 18% and EPS (Non-GAAP) up 17% compared with last year. Sequentially revenue was up 17.27% from Q3 compared to an increase of only 13.96% during the same period last year. It is on pace to exceed its three-year growth goals 2011-2013 of growing the PayPal business segment. In 2012 the company enabled more than $175 billion in commercial volume globally. This represents 19% of the total global e-commerce and almost 2% of total retail. Over the past three years the company has seen an average organic revenue growth of 16.5% Y/Y per quarter.

Analyst Day and Q1 2013 Overview

At Analyst day in March eBay outlined its three-year growth strategy. It reiterated its intent to grow the core Marketplace, PayPal and GSI Commerce businesses. In 2015 it intends to facilitate over $300 billion of global commerce. This represents over a $125 billion increase in global merchandise volume (GMV) over the next three-year time period. Over this same period it intends to grow revenue 50% to at least $21.5 billion by 2015. An expanded addressable market, mobile commerce technology and a strong portfolio of technology assets and capabilities will drive growth for the company over the next three years. Specifics on these momentum drivers are listed later on in this review.

During the company's Q4 2012 conference call it gave guidance for Q1-2013 of $3.65 - $3.75 billion in revenues, representing growth of 11% - 14%. Non-GAAP EPS of $.60 to $.62 representing EPS growth of 8% - 12%. Actual results for the quarter were revenue of $3.7 billion, up 14% year-over-year and EPS of $.63, up 14% from Q1-2012. Paypal and Marketplace both saw accelerating user growth enabling over $49 billion in global commerce, up 19% from $41 billion in Q1-2012.

Source: Capital IQ

Q1 Revenue Breakdown ($ millions)


Gr Y/Y

Q1 2013

% Q1-13

Q1 2012


Market Place
























Total Revenue


$3748 100%



Source: Capital IQ

Momentum Drivers


Growth in the Mobile segment has been a very strong driver for the company and I think the most important for the company in the future, namely with PayPal mobile. Total mobile transaction volume in 2012 was $13 billion, well ahead of the $10 billion forecast for the year. This represented twice the volume compared to 2011. The mobile app attracted over 2.8 million new users in the first quarter of 2013 compared to 4.3 million new users in 2012, and has been downloaded over 100 million times worldwide. The company has revamped the mobile app a number of ways, making it more attractive to new users. Through the partnership with RedLaser consumers can now use their eBay app to scan barcodes of products in person, which then looks for product listings online to find better deals, driving more traffic to the website. The new app also allows users to easily upload new auctions and snap pictures of the product right from their smartphones. Users also can receive alerts and notifications when they have been outbid, making for a much more convenient eBay experience and allowing for on-the-go users to be much more competitive in the bidding process. Fees on these transactions are higher because of the convenience and benefits the customers receive by getting alerts and notifications. Currently sellers are listing over 2 million products a week through the mobile application. eBay continues to leverage its mobile presence further through strategies, similar to Craigslist (In which eBay owns a 25% stake) allowing for more convenient local buying and selling of products through eBay Now. It is under testing and has been launched in New York, and San Francisco.

PayPal mobile enabled over $14 billion in mobile payment volume in 2012, nearly a threefold increase from the previous year. PayPal has 128 million active global users currently, with 5 million of them being added in Q1 2013 alone, representing the fourth-consecutive quarter of accelerating growth. Mobile payments accounted for nearly 10% of PayPal's total payment volume in 2012. The company looks to continue to leverage PayPal into a larger mobile presence with the entrance into new point of sale solutions. PayPal has recently partnered with Discover card to launch new POS solutions to nearly 7 million merchant locations nationwide. It has signed on with over 23 major retailers so far. It is currently in use at almost 20,000 retail locations across the U.S. in Home Depot, Foot Locker and Jamba Juice. An example of the capacity of this feature has allowed a Jamba Juice location in California to allow customers to order ahead, pay with PayPal and skip the line all through their mobile phones. The company views its PayPal mobile solutions as an enormous opportunity, in recent conference calls CEO John Donahoe and management have stressed this opportunity multiple times.

"PayPal intends to be everywhere consumers need an easy, safe, secure way to pay online, from your phone, favorite neighborhood store and at major retailers." - Q3 2012 Conference Call

"PayPal will be the only option out there that allows you to have your full wallet there, where you can pay with any financial instrument you want. You can put your loyalty cards, your coupons. And so much like you have one physical wallet, we think PayPal, our intent is to drive it to be the digital wallet. But that's going to play its way out over the next 6, 12, 18 months as we drive forward. We think our starting point is strong. And I'll just remind you, I've said it before, if we get 1% of offline retail, it doubles the size of PayPal. So we like our leadership position. We think it's an enormous white space, and we'll go after it aggressively." - John Donahoe - Q4 2012 Conference Call

Management predicts that eBay Mobile and PayPal Mobile will each generate $20 billion in transaction volume. The company is also expanding its PayPal mobile presence globally with its PayPal Here announced in Europe, and Japan. In Q1 PayPal Here became available to more than 2,700 retail locations in Japan.

Click here for more information regarding PayPal mobile solutions

International Exposure

eBay leverages its platforms and mobile capabilities to connect buyers and sellers globally. eBay continues to expand internationally with large opportunities in Brazil and Russia. It has recently launched eBay Style in China, which gives U.S. fashion sellers access to Chinese consumers. International Payment (PayPal) Sales represented 53% or $814 million of total payments revenue for the PayPal segment in Q4 2012, compared to $647 million in Q4 2011. This represents growth of 25.6% Y/Y for the international portion.

The company has also taken a number of strategic acquisitions in Asia, particularly in Korea, Japan and Singapore. Each country is expecting double-digit e-commerce growth over the next couple years. eBay has acquired Korean auction site Gmarket for $1.2 billion and has announced partnership with the founder to start operations in Japan and Singapore. eBay acquired ZONG in 2011, a mobile payment service provider, in order to tap the growing Chinese e-commerce market. It is unclear currently how this strategy has paid off.

"Consumers like Choices"

Unlike its competitors eBay offers consumers choices. Whether you want to buy it now or get bid hungry in an auction, consumers enjoy the flexibility that eBay offers. Since reorganizing the structure of the website the fixed price format now accounts for nearly 70% of Gross Merchandise Volume globally in 2012. This was up from 63% in 2011, 60% in 2010, 53% in 2009 and 45% in 2008. Consumers and large sellers enjoy the flexibility and speed associated with the fixed price offerings. Leveraging these fixed price offerings with a barcode scanner on the mobile app and consumers could find themselves going to the mall trying out new cloths, products, books and purchasing them right off eBay mobile simultaneously. More intriguingly consumers may not even have to wait a single night for delivery with eBay's new experimental mobile app "eBay Now." Being tested in San Francisco, and New York, consumers can purchase products straight from their phone from stores like Macy's, Target, and Walgreen. This may challenge Amazon Prime, Amazon's unlimited free two-day shipping program, which lets users buy millions of items with two-day shipping for $79 a year.

Stewardship and Sustainability (ESG)

While this section may be atypical to some investors, I think it is important for a long-term approach to understand what steps a company is taking to implement Environmental, Social and Corporate Governance (ESG) practices into its businesses. I have written another article briefly outline what it means for a company to be social responsible and perhaps some competitive advantages that these ESG functions might offer in (My previous article).

Sustainability at eBay has had an ever growing presence within and out of the company. First off the company is inherently a promoter of good environmental practices. Its core business model is the trading of pre-owned, used products. What's more sustainable than reusing what is already made? While clearly I think that this is a prime example of sweet serendipity, or a "happy accident" the company has furthered its efforts substantially to promoting good ESG practices. Ebay created the first of-its-kind Cradle-to-Cradle Box. This 100% recycled material box enables users to use and reuse the same package for multiple shipments and is created with water-based ink. The boxes are designed to encourage sellers to reuse their boxes and for buyers to become sellers.

The company has been implementing sustainability into new building design and data centers. The company has been recognized with multiple awards for its LEED Gold facilities (Award Article), most namely Green IT Magazines award for "Environmental Project of the Year" with its Topaz data center in Utah (Green Data Center). The company has implemented energy savings initiatives into its data centers, which have had the combined impact of reducing the net energy per transaction by 55% since 2008. That's some good stuff! eBay is also a member of multiple advisory groups such as the Green Grid End User Advisory Council and Data Center Pulse.

The company also implemented the "Green Team" within the organization with about 2500 employee members that seeks to facilitate sustainable practices and promote education amongst buyers/sellers and local communities about the impacts of their actions.

These practices and policies are enforced all the way from the top by CEO, John Donahoe.

"In 2009, at the request of CEO John Donahoe, eBay Inc. established a cross functional Global Sustainability Steering Committee (SSC) comprised of functional business leads who own the company's energy footprint. The SSC is chartered with the responsibility to establish goals regarding eBay Inc.'s greenhouse gas (GHG) emissions and other sustainability issues, ensure that plans are in place to achieve these goals, and monitor the company's progress on an ongoing basis." -Company Website

Summary and Outlook

To many investors and myself it is clear that eBay is a forward thinking company that is doing the right things today for growth tomorrow. Its mere squishy guidance numbers appear to me nothing more than just a weaker-than-expected euro and a little more capital expenditures to capture eBay's addressable market. As the CFO concluded in the Q1-13 Conference call.

"Marketplaces is strong, particularly in the U.S., driven by investments in buyer and seller experiences. And GSI is performing in line with our expectations as we continue to invest in technology and growing the client portfolio. We are investing in our business for the long term, and we are focused on delivering the next generation of global commerce and payments capabilities."- CFO Robert Swan

Disclosure: I am long EBAY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.