eBay's Future Is Murky As PayPal Spinoff Looms

Apr. 23, 2015 12:50 PM ETeBay Inc. (EBAY)8 Comments
Daniel James profile picture
Daniel James
217 Followers

Summary

  • eBay came out with some encouraging numbers for its latest earnings report.
  • However, Paypal again did the heavy lifting, for the first time eclipsing marketplace revenue.
  • With the impending spinoff and disappointing numbers from the marketplace segment, eBay's future is unclear.

eBay (NASDAQ:EBAY) was one of the first companies to get in on the boom in online shopping, and it was initially a very profitable endeavor. The environment, however, has changed. Increased competition from rivals and shifts in consumer preference towards faster alternatives is putting pressure on the company's core business. Although eBay delivered a healthy beat for its most recent report, most of this growth was attributable to its soon to be spun-off payments division, PayPal. As such, its post-spinoff future looks murky to say the least.

Payments growth

All in all, it was a strong first-quarter report from eBay. Adjusted EPS of $0.77 rose 10% year-over-year, easily beating the $0.70 analyst consensus. Meanwhile, revenue rose 4.4% to $4.45 billion, also coming in ahead of estimates. Shares rose around 6% in after-hours trade, as investors cheered the beat. However, digging a little further into the report, it becomes clear that all is not well with eBay's underlying business.

For the first time in the company's history, PayPal sales surpassed those of the core marketplace division. The payments segment has for a long time been growing faster than its sister company, and the Q1 report once again highlights to what degree the momentum behind both businesses is diverging. While PayPal saw revenue surge 14% for the quarter, the marketplace segment saw sales fall by around 4%.

The revenue decline in the segment is the first since 2009, as results were partly impacted by a stronger dollar. Gross merchandise volume also declined, down by around 2%, and international volume was down by some 4%.

EBay will, in the short term at least, not have to worry about competition from PayPal. Under the terms of the deal, both have agreed not to develop competing product offerings. However, it has plenty of other problems to worry about.

Marketplace weakness

EBay, like many of its peers, is facing increased competition from the 800-pound gorilla of e-commerce, Amazon (AMZN), as well as a host of other online channels. While global e-commerce sales are projected to rise by 21% this year, EBay's marketplace has so far lagged this growth, averaging around 6.4% for the first three months of the year.

To prop up the bottom line, the company has slashed around 7% of its workforce, which was one of the factors driving the earnings beat. Additionally, the company is recovering from a data breach as well as a change in Google (GOOG) (GOOGL) search algorithms which drove down traffic to the site. Still, without a means of rebooting the sluggish growth in marketplace sales, the prospects of the standalone company look fairly dim at the moment.

According to management, the marketplace business looks to be stabilizing, but it remains to be seen in the coming quarters to what degree the segment can return to sustainable growth. Even with the PayPal business still on board, revenue guidance for the coming quarter looked a little weak, Q2 sales of $4.4-$4.5 billion coming in below a $4.6 billion consensus.

Conclusion

PayPal has been the main driver behind eBay's growth over the last few years, and with the impending spinoff, the future looks uncertain for eBay. Its marketplace division posted a decline in revenue for the quarter, its first since 2009, and although this is partly due to the stronger dollar, the segment is facing continued challenges and increased competition. While an increased focus on its core operations may boost sales in the long term, it remains to be seen how well the company will perform without PayPal.

This article was written by

Daniel James profile picture
217 Followers
I am a part-time investor interested in bonds, stocks, etfs and macro.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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