Is eBay Facing a Best Case Scenario?

| About: eBay Inc. (EBAY)
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Having had a chance to review eBay's (NASDAQ:EBAY) Q3 results in more detail and analyze the various opinions of analysts, users and shareholders, I can't help but think eBay may actually be facing a best case scenario going into Q4 and 2008.

Payments: No Longer Tied at the Hip

Not so long ago, PayPal and Marketplaces were Siamese twins. PayPal relied heavily on Marketplaces for most of its business and Marketplaces relied on PayPal to increase the velocity of trading. As such, their fortunes had an elevated correlation. PayPal Merchant Services, dwarfed by the magnitude of the aforementioned relationship remained below the radar of most EBAY stakeholders. But take a look at eBay's Q3 results and you'll find PayPal Merchant Services has come from nowhere to nearly overtake "on-EBAY" TPV. Whats more, Merchant Services growth, at 61% Y/Y, is not only accelerating but the highest it has been in the past few years. All of this means that PayPal, which generates 25% of EBAY's revenue, is finally free. Possibly for the first time ever, PayPal's success no longer depends on EBAY's Marketplace. Why is this important? Many reasons, but I will give you just one. PayPal could finally be spun-off credibly as a standalone company.

Communications: Underpromise and Overdeliver

Now that eBay took an impairment charge of $1.43 billion and sent GAAP earnings into negative territory for the quarter, expectations for Skype are so low that some even expect it to die. eBay have finally reversed their Skype game plan to underpromise. But given 4-year old Skype is still the runaway leader in VOIP communications and still growing, this may well be the most intelligent impairment of recent times. Not to mention, the impairment conveniently adds something like $50 million in the form of reduced goodwill expense to EBAY's GAAP earnings every year for the next 30+ years. With a new CEO, the earn-out gone, and new partnerships in place, Skype could be setting itself up to overdeliver.

Marketplaces: 'Why's Everybody Always Pickin On Me'

This is the most misunderstood business at eBay. It's a classic spider web of variables including ASPs, Conversion Rates, Active Users, Registered Users, Core Listings, SIF Listings, Auction Listings, Fixed Price Listings, Listing Fees, Final Value Fee, Promotions, Gross Mechanise Value, Non-GMV Revenues, etc, etc, etc. Pull one vector and it tugs the others in different ways. So the only way you can objectively judge the Marketplaces business is by the end financial result. Which brings us to Y/Y revenue growth, which has accelerated two quarters in a row and which is double-digit even if you strip out acquisitions and FX benefits. But most importantly, this could be the trough before the benefits of Marketplaces' raft of changes to the user experience start to kick in. If so, and Q4 datapoints so far lend support, Marketplaces could catch a strong tailwind.

At the time of writing, EBAY had just closed Friday and the week at a price of $36.72.