I remember when eBay (NASDAQ:EBAY) was founded back in 1995. It was a phenomenal success, creating thousands of new small businesses selling all manner of goods and services via auction and operating out of garages across America. The resulting revolution reinvented the mom-and-pop shop, granting small-time entrepreneurs access to a suite of sophisticated Internet tools to build a storefront on one of the busiest virtual streets in the world.
But, as people's fascination with the auction process waned over time, the bloom fell from that electronic rose. eBay has had to evolve to be less dependent on small entrepreneurial auctions and friendlier towards larger mass-merchandising efforts at fixed prices.
At the end of last year, eBay had more than 100 million active users around the world and the total value of the goods sold on its platform was over $60 billion (all figures in U.S. funds) or $2,100 every second. This global e-commerce platform has provided the company with steady cash flow since its founding and continues to do so today. But the real gem of the business and its main driver of future growth lies deeper within the company.
PayPal, the company eBay acquired in the fall of 2002, enables online transactions through secure electronic payments, something few companies were supporting in the early days of e-commerce. eBay acquired the company because a large percentage of eBay's customers were using PayPal to complete their online transactions. It was a natural fit.
PayPal has since grown to have over 106 million registered accounts worldwide and has developed into a virtual "wallet in the sky" that will be generating 50% of eBay's total revenue next year. It has enabled secure transactions for millions of online retailers and works with most of the major currencies and many of the minor ones around the world. But the real excitement for PayPal is just beginning. The world is rapidly adopting mobile transactions and payments via smart phones. PayPal, with its large user base on both the buy and sell side, is well-positioned to benefit from this rapidly growing trend.
For example, PayPal is rolling out a program in 2,000 Home Depot (NYSE:HD) stores to allow shoppers to pay at the register using their PayPal account with just their mobile phone number. Within the next few years, a very significant number of transactions will be handled in just this way.
But enabling transactions is only part of the story. eBay's massive consumer data base will help merchants better engage customers based on their established shopping habits. Merchants would be alerted when a customer is in their store, initiating a range of instant personalized marketing opportunities like money saving coupons and related incentives. This will also work online with targeted ads delivered to a customer's desktop and mobile devices.
eBay's most recent quarter was very strong. Earnings per share reached $0.55 which was ahead of estimates and 18% more than last year. The e-retailing and auction business grew by 12% to $18 billion and fixed-price sales grew by 18%. PayPal had an excellent quarter with registered users growing by 12% and revenue growing by 32%. Moreover, 50% of the revenues from both businesses came from outside North American, so the company offers excellent geographic diversification. The stock did move up after the results came out but still looks cheap at 17.5 times anticipated earnings. That makes eBay a bargain compared to the prices being paid for Amazon (NASDAQ:AMZN), Visa (NYSE:V), Yahoo (NASDAQ:YHOO), and others in the category.
eBay has additional elements to its business that help strengthen its relationships with the retailers. GSI Commerce, acquired by the company in 2011, develops advanced technology and marketing solutions that enable retail participants large and small to improve the customer experience and reduce costs. The company also has a number of joint ventures and partnerships in China, Latin America, Japan, and Taiwan, to name a few. The company also owns StubHub, an online ticket business, and a piece of craigslist.org as well as Shopping.com.
Of course, eBay won't be alone in pursuing mobile payment options. Visa (V), MasterCard (NYSE:MA), Google (NASDAQ:GOOG), and other startups like Square are all working on platforms. But PayPal has a good head start and will be amongst those companies that dominate the rapidly growing trend in the post-cash and now post-credit world we are moving toward.
The shares do not pay a dividend. Closing price on Friday was $38.36. Action now: Buy eBay with a target of $48.
Disclosure: I am long EBAY.