eBay Q2 2014 Preview: Positive On PayPal, But Competition A Long-Term Risk

| About: eBay Inc. (EBAY)


eBay will report Q2 on Wednesday.

I am cautious going into the result as long-term competitive risk is a key concern.

Positive on long-term implication of PayPal, but I don't expect it to offset the competitive risk.

eBay (NASDAQ:EBAY) is slated to report Q2 results this Wednesday. The consensus expects $0.68 in EPS (+8% y/y) on $4.4b in revenue (+12% y/y). I expect eBay to continue to grow on the back of PayPal given its solid growth profile. Longer-term, I expect PayPal to be disruptive in the mobile payment industry. However, my long-term concern is the intensifying competitive environment for the marketplace business.

PayPal leading the way

I see PayPal a potential disruptor of the mobile payment space. While the online payment space is gradually becoming crowded with entrants such as Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG), PayPal has made positive progress into the real world, which I expect to be equally successful given PayPal's brand power and first mover advantage.

The PayPal model is truly compelling, in my view. The growing number of PayPal users (~150m and counting) creates a strong network effect that incentivizes merchants to sign up so they can cater to their customers. From the merchant's perspective, the platform allows them to keep track of customer credit card details in an organized fashion, translating to solid user experience. Moreover, innovation such as PayPal Beacon's "tap and go" function is facilitating transaction in a way that customers are no longer required to take their phones out to pay, which I view as accretive to building a strong network effect and future revenue growth.

Competitive risk a long-term challenge

In the near term, both Amazon and Google are direct competitors to eBay's marketplace business. Moreover, same-day delivery and new product verticals by both Amazon and Google will weigh in on eBay's marketplace growth.

Longer-term, Alibaba could be a threat as my conversation with industry professionals indicates that Alibaba is very interested in expanding its presence in North America and draw merchants away from eBay and Amazon by leveraging its ad-based model. Alibaba's recent introduction of its US website, 11main.com, is a testing ground for Alibaba to understand the North American ecommerce market so that it can eventually roll out a larger platform to compete against eBay and Amazon. Just a note, Alibaba's gross merchandise volume in 2013 was ~$250bn, bigger than eBay and Amazon combined (~$180b), so it will not be a surprise for Alibaba to leverage its scale to compete against the North American ecommerce giants.

I remain cautious on eBay ahead of result as I don't see PayPal's current growth profile, while robust, offsetting eBay's long-term risk profile.

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