Why eBay's Second-Quarter Results Reveal Continued Strength

| About: eBay Inc. (EBAY)

Global Internet commerce firm eBay (NASDAQ:EBAY) reported another strong quarter on Wednesday. Revenue for the second quarter jumped 23% from the year-ago period, to $3.4 billion, roughly in line with expectations. Meanwhile, earnings per share increased 16% year over year to $0.56, a penny above the consensus estimate. The firm registers a 10 on the Valuentum Buying Index (the highest mark), and we think shares remain undervalued. eBay reiterated third-quarter guidance of $0.53-$0.55 and full-year earnings guidance of $2.30-$2.35 on revenue of $13.8-$14.1 billion.

PayPal continues to be a key growth driver at the e-commerce giant. During the second quarter, the firm processed over $34 billion worth of transactions, an increase of 20% over the same period in 2011. Revenues for the segment grew 26% to $1.4 billion across over 113.2 million users (a 13% increase compared to a year ago). Payment processing margins increased 270 basis points over the same period last year to 66.3% on a take-rate of 3.94%. Mobile payment adoption and merchant acceptance continues to grow, and PayPal now has 16 committed national point-of-sale payment processing customers. Although PayPal still has a long way to go before matching Mastercard (NYSE:MA) or Visa (NYSE:V) in terms of payment processing volumes, we are confident PayPal will continue to grow thanks to secular tailwinds and market share gains.

In addition to strong growth at PayPal, eBay itself experienced decent expansion in the second quarter. Gross merchandise volumes advanced 10%, to over $16 billion, driving revenue growth of 9%, to $1.8 billion. Though alternatives like craigslist.com and Amazon.com (NASDAQ:AMZN) remain popular, eBay's integration with PayPal and extensive network make it an attractive e-commerce outlet. GSI, acquired by eBay in the second quarter of 2011, also continues to post strong results, adding $221 million in revenue. GSI, which provides the e-commerce infrastructure for firms, generated 21% same-store sales growth in the second quarter. We think GSI will eventually become an even more meaningful addition to the revenue mix.

eBay remains a cash cow, generating $411 million in free cash flow in the second quarter, while increasing its cash and cash equivalents to $7.6 billion. Management also repurchased $355 million in stock and authorized $2 billion in additional stock buybacks. With an incredibly healthy balance sheet, an increasingly valuable asset in PayPal, and strong organic growth in its own marketplace, we think eBay is one of the best investment opportunities available right now. We hold the firm in our Best Ideas Newsletter portfolio, and we believe shares will continue to converge to their intrinsic value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Some of the firms mentioned in this article are included in our Best Ideas portfolio.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , , , Catalog & Mail Order Houses
Problem with this article? Please tell us. Disagree with this article? .