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Shares of eBay (NASDAQ:EBAY) fell some 4% on Thursday after the e-commerce market place and payment provider announced its third quarter results.

Little convincing third quarter results and a cautious guidance into the all-important holiday season are the main reasons behind the correction.

I remain on the sidelines on valuation concerns. eBay's valuation has been driven by the success of PayPal, which could face more competition with major competitors all eyeing the multi-billion market.

Third Quarter Results

eBay generated third quarter revenues of $3.89 billion, up 14.3% on the year before, but slightly below consensus estimates at $3.91 billion.

GAAP earnings rose by 15.4% to $689 million, as GAAP earnings per share came in at $0.53 per share. Non-GAAP earnings totaled $0.64 per share, beating consensus estimates by a penny.

CEO John Donahoe commented on the third quarter performance, "Our scale and experience, the strength of our global commerce platforms, our technology assets and our mobile commerce capabilities strongly position us to be a leader in the commerce revolution under way. In the past 12 months we have enabled $200 billion of commerce volume, a 20 percent increase in a fairly lackluster macro environment."

Looking Into The Results

eBay continued to show impressive growth, notably at its PayPal unit. Revenues at PayPal rose by 18.5% to $1.62 billion, as total payment volumes rose by 24.7% to $43.84 billion. PayPal still takes quite a high cut being the middle man. On average it receives 3.7 cents for every dollar transferred on the platform.

Marketplace revenues were up by 12.2% to $2.03 billion, as gross merchandise value rose by 12.8% to $18.36 billion. eBay generates revenues equivalent to 11.04% of the merchandise value.

The remainder of the revenues were being generated by solid, but no spectacular growth at the enterprise unit.

Outlook

For the current fourth quarter, eBay sees revenues of $4.5 to $4.6 billion, up 14% at the midpoint of the range. Analysts were looking for fourth quarter revenues of $4.64 billion.

GAAP earnings are seen between $0.67 and $0.69 per share, up from last year's earnings of $0.57 per share. Non-GAAP earnings are seen between $0.79 and $0.81 per share, below consensus estimates at $0.83 per share.

Valuation

eBay ended the quarter with $13.0 billion in cash, equivalents and non-equity investments. Total debt stands at $4.5 billion, for a net cash position of around $8.5 billion.

For the first nine months of the year, eBay generated revenues of $11.52 billion, up 14.3% on the year before. Net earnings rose by 7.9% to $2.00 billion in the meantime.

Full year revenues are seen around $16 billion as eBay is on track to report net earnings of $2.8 billion.

Trading around $52 per share, the market values eBay at $67 billion, or its operating assets around $59 billion. This values operating assets around 3.7 times annual revenues and 21 times annual earnings.

Despite the solid cash balances, eBay does not pay a dividend at the moment.

Some Historical Perspective

Unlike most of the internet companies, eBay's share price didn't peak around 2000, but actually in 2004 when shares were trying to break the $60 level. Ever since shares sold off to lows of $12 during the 2009 crisis. In recent years they have seen a solid recovery again, trading as high as $58 earlier this year. Shares have retreated some 10-15% to current levels around $51-$52 per share.

Between 2009 and 2012, eBay has seen solid growth. Annual revenues rose by a cumulative 61% to $14.1 billion, while earnings rose by merely 9% to $2.6 billion. Notably revenues are expected to rise further in 2013, while earnings growth will be limited.

Investment Thesis

So eBay appears to be moving along just fine, yet investors are concerned a bit. Revenue growth is slowing down, and after years of investments, earnings growth is not really keeping pace with revenue growth in general, although third quarter earnings growth outpaced revenue growth.

A crucial metric for the company is the "Enabled Commerce Volume," or ECV, which grew by 21% to $52 billion, demonstrating the capabilities of Marketplace, PayPal and the Enterprise unit. eBay furthermore noted that mobile volume grew by 75%.

PayPal remains the main driver behind growth, gaining 5.0 million new users, bringing the total active user base to 137 million, up 17%. Total payment volume grew even faster to $44 billion, suggesting the average user pays or receives about $321 via PayPal per quarter. With competitors like Google (NASDAQ:GOOG) and Square among others targeting online and mobile payments, eBay might see increased competition.

While payment volumes will undoubtedly increase, even with more competition, net revenues might be under pressure. One wonders how many people are willing to make big payments, while they have to pay an average commission of close to 4% per transaction.

The market place business gained 3.9 million users to end up with a customer count of 124 million. In total they bought and sold for $18 billion worth of goods, an average of $145 per user for the three month period.

eBay needs this large and growing customer base to compete with Amazon.com (NASDAQ:AMZN), Facebook (NASDAQ:FB) or Google, each having superior customer bases, and each capable of developing their own payment model. It seems that nowadays each of these tech giants is trying to boost their "ecosystem." To boost eBay's payment offerings in the field, and notably reinforce its positions for mobile devices, the company bought Braintree for $800 million last month.

Still investors are not happy. eBay saw a deterioration in the economic environment throughout the quarter, partially due to the government shutdown. According to CFO Swan, e-commerce growth rates slowed down to 13% over the recent quarter, down from 16% in previous quarters. Surprisingly Europe and Asia were more stable and resilient during the quarter, while the US operations were the volatile spot. Swan saw a "pretty rapid deceleration of the market, in a relative short period of time."

eBay reiterated its statements issued at the Analyst Day. It still sees $300 billion in ECV by 2015, up 70% from the expected $175 billion in 2012. Trailing commerce volume is already reaching $200 billion at the moment. Both PayPal and eBay are expected to do $20 billion in mobile volume this year.

Back at the end of September, when eBay announced the acquisition of Braintree, I last took a look at eBay's prospects. I concluded that PayPal is integral to the company's success, in an attempt to transform the entire business into a technology company.

At the time shares were trading around $56 per share, or 23 times earnings, which was a bit rich for my taste, especially with more competition for PayPal ahead. Ever since, shares have lost some 8% over the past three weeks.

I concluded that I like the long-term prospects of the business. That being said, increased competition for PayPal while the stock trades at a premium valuation made me cautious. Shares have sold off even more, but I still don't find shares attractive at the moment.

Source: eBay - No Reason To Celebrate This Holiday Season, As Competition Will Intensify