eBay (EBAY) reported strong second quarter results; revenue increased 14% year over year to $3.9 billion. It generates revenue through two segments, Marketplace & PayPal, and both the segments witnessed strong growth. eBay is further adopting various strategies, which focus on enhancing customers' shopping experience. These strategies will act as a growth driver of the company's future incremental earnings.
PayPal- A star performer
In the first half of 2013, PayPal added approximately 10 million additional accounts, reaching 132 million active users. PayPal accounts for almost half of the eBay's revenue, which is very significant for the company's growth. To increase its presence at traditional brick and mortar stores, it recently launched a device known as Beacon. This device will be installed in stores and will automatically connect with shoppers' smartphones. Customers only need to give a verbal sign to the merchants and payment will be initiated. Money transfer through PayPal requires a GPRS connection or Wi-Fi, but this device will use Bluetooth technology, enhancing its offline presence. This will improve PayPal users' shopping experience. With this, the company estimates to generate revenue of $20 billion by the end of this year.
This strategy will act as a growth driver in the scenario of rapid trend shift towards smartphones and customers finding easy ways for electronic payments. We expect Beacon to increase the number of PayPal accounts, as only PayPal users will be able to access this device, providing an upside to its earnings.
Apple (AAPL) has developed similar technology in its recent i0S 7 software update. Its updated software has an iBeacon feature, which also uses Bluetooth technology to transmit data. This new feature will allow Apple users to make payments in an outlet without using GPRS or Wi-Fi. iPhone users don't need a PayPal account, thus posing a risk for eBay.
We believe eBay will have a competitive advantage over Apple's iBeacon since PayPal's beacon services will be provided to Android users as well as iPhone users, whereas iBeacon services are limited to iPhone users only. Since 70.1% of smartphone owners use Android devices, in comparison to 21% for i0S, eBay's PayPal will cover a larger customer base and will remain the dominant player in electronic payment system.
Comparison of Same Store Sales, or SSS with its rival
In August, the overall growth for e-commerce was 16%. However, eBay's SSS reported a 19% growth rate, better than the overall e-commerce growth rate. The company's marketplace segment is also contributing to strong growth in the near future. Its Marketplace segment represents approximately 50% of the company's total revenue. On its marketplace platform, eBay displays various companies' products, and eBay receives revenue for product sales. The company stated that it is expecting 30 more companies to have stores on its Marketplace platform by the end of this year. The inclusion of these companies' additional products will broaden customers' options, attracting more customers towards its website.
The last quarter launch of Cassini, a specialized search engine, in North America will add to the growth of this segment. This search engine will tailor the search results to the customer's previous product preferences, easing the way customers purchase products. These factors will drive the Marketplace segment's growth and will have a significant impact on the company's revenue. Analysts expect its top line to increase from $16.17 billion this year to $18.81 billion.
Its competitor, Amazon.com's (AMZN) SSS came out to be 24% in August, which is also more than the overall e-commerce growth rate of 16%. Despite its SSS higher than e-commerce growth rate, its SSS rate declined drastically from 40.4% a year ago. The reason behind this decline is increasing competition, which Amazon is countering by slashing prices. Amazon has cut the prices of its high margin web services, which will have a negative impact on the company's bottom line, leading towards lower returns to equity. This is an important valuation multiple for income investors as it represents the percentage of net income distributed to its shareholders. With its weak bottom line, Amazon currently has negative return to equity of 1.24%, implying a loss.
Conversely, eBay generates strong free cash flows with its strong fundamentals, as discussed above. It generated $658 million of free cash flows in the second quarter of 2013. With its strong free cash flows, the company currently returned 13% of its net income to its shareholders, which is much higher than Amazon's return to its shareholders, making eBay a buy for income investors.
With the adoption of various strategies, both segments of the company indicate high earnings growth potential. Its operations will enhance the customer shopping experience, leading towards incremental earnings, which are expected to upsurge from $2.35 per share this year to $2.78 next year. Along with this, its operations have competitive advantage over other competitors as discussed above, which will allow this e-commerce giant to continue its market dominance.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.