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Summary

  • The top line is a critical component of eBay's success, and following the cyber attack, it has still remained healthy, despite its results being below the estimates.
  • The extraction of other brands' customers, such as those of Argos, will increase eBay's base.
  • Extending loan capability to small merchants should bring an additional base of retailers, which cannot be gained through mere marketing.
  • A growing industry, along with sound operations gives eBay a buy rating.

eBay Inc. (NASDAQ:EBAY) was hit by a cyber attack last May, in which 145 million customer accounts were made vulnerable. The company has seen its search rankings fall recently and its payment chief depart, resulting in further turmoil. Growing competition also remains a problem, with competing mobile payment systems from Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) remaining a major headwind. These issues alone have caused the share value to decline by nearly 11% in one year. However, after eBay announced its second-quarter results this week, the shares climbed by more than 1.5% in after-hours trading after the U.S. market closed.

In this article, I will discuss the company's earnings and the performance of the recently ended quarter. I will also outline the future potential of this online reseller.

Second Quarter

eBay's quarterly results were lower than expected but still positive, as revenue climbed 13% to $4.4 billion. The company's commerce network continued to gain market share, with total company commerce volume, "ECV", increasing 26% to $62 billion. Mobile ECV increased by 68% to $12 billion. The mobile trend continued to grow as more and more consumers shifted towards purchasing items using their smartphones. The company now delivers nearly 20% of its volume through the mobile channel. International expansion also remained healthy, with cross-border trade growing 26% and representing 22% of the company's total ECV.

PayPal signed a deal with GE Capital to offer a dual-branded retail credit card, and planned to purchase the loan portfolio in 2016 for an estimated $1 billion. The action seemed reasonable, as it will provide PayPal the flexibility to expand its credit offerings to consumers and merchants, while improving its ability to manage transaction expenses and reinvest for future growth.

PayPal also continued to expand, as net total payment volume, "TPV", grew 29%. Revenue was $1.9 billion, with 4 million new accounts opening. While the total revenue growth was below the guidance figures, I believe that, given the present competition environment, sustaining growth was a challenging task. This is because only buyers representing 80%-85% of volume have reset their passwords following the cyber-attack, and many have not yet returned to their previous activity levels. eBay needs time and efforts such as targeted marketing to reengage these and other users back to its website. I suggest investors refrain from worrying about guidance figures and concentrate on absolute return measures. In that sense, eBay delivered a good top line last quarter and there wasn't anything to worry about.

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Source: Presentation

Marketing expenses rose due to attempts to attract more customers, owing to dwindling numbers after the cyber attack. Product development expenses rose slightly as the company attempted to offer a better customer experience. A general trend that became evident was the fact that eBay is spending more to engage and retain customers. While general costs remained nearly constant, the company was able to extract diluted earnings per share of 53 cents, reflecting an increase of 8% in comparison to the figures of the same quarter last year.

eBay's expansion plan continues, as the firm announced its plans with Argos in the U.K. to expand its Click & Collect service to approximately 650 stores. The expansion puts the shopping feature within 10 miles of most of the U.K. population. By year-end, it is expected that 65,000 eBay sellers will offer items that can be purchased online and picked up at an Argos store. The move will allow eBay to extract Argos's consumer base and those customers to shop on eBay and use PayPal for their transactions.

Secondly, PayPal is now supporting eBay sellers by extending credits to small merchants to help them grow. The program will loan $1 million a day to small business merchants, giving them access to capital. This program will bring an edge to the company's strategy, especially after Google changed its search algorithm, which is now negative to eBay. This loan extension is likely to go beyond mere advertising through word of mouth, and is needed by merchants for their own business growth.

Bottom Line

The online retail sales in the U.S. will grow at a compounded annual growth rate of 10% over the next few years and account for 10% of total U.S. retail sales by 2017. eBay is expected to benefit from this trend. With 60% users now using multiple screens to make purchases, eBay will also cross-benefit from the integration of mobile shopping interfaces. The growing market, together with recovery after the cyber attack should also support eBay's marketing and customer-gaining efforts. For all of these reasons, I recommend buying the stock.

Source: Marketing And Expansion Are The Future Of eBay