Another quarter, another big win for eBay (NASDAQ:EBAY). On Wednesday, the company reported Q1 earnings of $677 million, or 51 cents per share - up 19 percent from $570 million, or 44 cents per share, in the same period a year earlier. Adjusted earnings were 63 cents per share, up from last year's 55 cents, slightly above analysts' expectations of 62 cents. How does eBay win?
In four ways. First, through economies of networking. Typically, economies of networking are the benefits associated with a larger and larger number of consumers buying a certain product - the larger the number of people using the product, the more valuable the product to each user, as they apply to software usage. Economies of network in eBay's model arise as the number of people who participate in online auctions grows, either on the sell side or the buy side increases.
Second, through innovation. The company has been expanding to new business that support and re-enforce its core business, like online payment systems, with the successful acquisition of PayPal. Third, aggressive overseas expansion, as close to 60 percent of the company's growth comes from emerging economies. Fourth, collective entrepreneurship, a business model whereby big online companies work together with small vendors to discover and exploit new business opportunities. eBay, for instance, is currently working with retailers to install multi-screen terminals at the point of sale to entice online shoppers.
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ebay's winning model has caught the attention of Wall Street with its stock up 3,000 percent since it went public in the late 1990s. This means that the expectations have been high going into the last earnings report, and that can explain why the stock took a hit after the report. Nevertheless, we still believe that the stock is a buy, as it is undervalued compared to other online companies like Amazon.com (NASDAQ:AMZN). ebay, for instance, trades at a forward PE of 18.10 compared to 73.64 for Amazon.com. Ebay's operating margins are 20 times higher than those of Amazon.
A few words of caution: Online auctions and online payments are sensitive to technological innovations and business cycles that can have a negative impact both on the short-term and the long-term performance of eBay. Hype should never be a substitute for due diligence.