Can eBay Survive Without PayPal?

Summary

• eBay's revenues indicate that it can survive without PayPal.
• With its current business model, the company will not experience significant revenue growth without PayPal.
• Revenue figures indicate that eBay's marketplace business has lost its momentum.
• Fulfillment by Amazon is a better online retail solution for third-party sellers than eBay's new Valet service.
• eBay is facing intense competition in the lucrative third-party sales sector from Amazon, Wal-Mart, Staples and other online retailers.

The simple question of whether eBay Inc. (NASDAQ:EBAY) can survive without PayPal has been on my mind a lot lately, because I'm both an eBay investor and an eBay retailer. The question also is a very reasonable one if you take a look at eBay and PayPal revenues.

eBay reported TTM revenue of $17.9 billion on December 31, 2014. That revenue has been growing steadily for some time - it was $16.05 billion in December 2013. The problem is that PayPal's revenue makes up around 44% of eBay's revenue. My calculation is that PayPal's revenue for 2014 was around $7.786 billion. Subtract PayPal from eBay, and the auction site's TTM revenue would have been $10.114 billion in 2014.

Can eBay Grow Without PayPal?

Judging by revenue alone, eBay could survive without PayPal, but would it actually grow without PayPal? PayPal reported that its TTM revenue grew at a rate of 18% between fourth-quarter 2013 and fourth-quarter 2014. During the same period, eBay's TTM revenue grew at a rate of 8.63%. The question we need to ask is, how much of that growth was driven by eBay's marketplace?

eBay reported that its marketplace revenue grew by 1% between fourth-quarter 2013 and fourth-quarter 2014 in this PDF. Although, it did report that marketplace revenues grew by 8% between the third and fourth quarter of 2014. The problem with that growth is that a lot of it was probably driven by holiday shopping.

It looks as if eBay's core marketplace or auction business has lost its momentum. The company's growth is being driven by PayPal, where business is booming. PayPal reported that the total volume of transactions it processed in fourth-quarter 2014 was $64.3 billion, an increase of 24% over the same period in 2013. PayPal's Merchant Services, which make up 76% of its business, grew by 33% in the same time frame.

eBay Needs to Restructure Its Markets, and Fast

It looks as if eBay will need to do a radical restructuring if it wants to compete with Amazon.com (AMZN), which has made an aggressive push into eBay's realm of third-party sales. Third-party sales accounted for 40% of the merchandise that Amazon moved in 2014, according to The Wall Street Journal. The amount of stuff sold through Amazon's shipping and storage service, Fulfillment by Amazon, grew by 65% in the same period.

Amazon also reported that third-party merchants sold two billion items through its ecosystem in 2014. or double what they had sold in 2013. VentureBeat estimated the value of Amazon's third-party sales for 2013 at $17 billion. That means the value of Amazon's third-party sales could now be in excess of $30 billion.

These programs are certainly paying off for Amazon - the "Everything Store's" revenues have been growing at a staggering rate. Amazon's revenue grew from $74.45 billion December 2013 to $88.98 billion in December 2014, indicating that the company has successfully captured growth from eBay.

eBay is trying to counter this threat with its Valet service and Global Shipping Program. The problem is that eBay's solution is not as flexible as Amazon's - you cannot sell items that are worth less than $40 through the Valet service. There also is a long list of items that cannot sell through eBay's Valet service, which is why I personally do not use it.

I do use Fulfillment by Amazon, because it makes my life and business a lot easier. The truth is that Fulfillment by Amazon is the better solution for online retailers.

Threats to eBay's Business Multiplying

It is not just Amazon.com that eBay has to worry about. Wal-Mart Stores Inc. (WMT) and Staples (SPLS), the third- and fourth-largest online retailers, have launched their own third-party marketplaces. Wal-Mart operates Wal-Mart Marketplace, and Staples has rolled out Staples Exchange.

Wal-Mart Marketplace, in particular, could be a threat to Amazon.com and eBay because of the retail giant's recent investment in online infrastructure. Wal-Mart plans to invest between $2.2 and $2.5 billion in online retail over the next two years. That investment includes two massive online fulfillment centers, each of which will be over one million square feet in size.

Also on the horizon is Alibaba (BABA), which has been investing heavily in U.S. companies, but not in U.S. infrastructure. However, my guess is that Alibaba will concentrate on China for now and ignore the U.S. market, because the cost of a major foray into U.S. online retail would be too steep.

A standalone eBay will face a tough battle to maintain market share in the years ahead. It faces larger and well-financed competitors willing to spend large sums to ramp up their business. My prediction is that eBay will survive, but remain a niche player in online retail with a falling share of the market.

Disclosure: The author is long EBAY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.