Why eBay isn’t the business you thought


Shares of eBay (Nasdaq: EBAY) hit a 52-week high recently. Let’s take a look at how it got there, and see if clear skies are still in the forecast.

How it got here
Please keep your arms and legs inside the car while the vehicle is in motion. Online auction and payments company eBay has found its groove again, and it looks ready to take investors for quite a profitable ride.

In its second-quarter results reported last month, eBay recorded a 23% rise in sales, as profits climbed 16%. Despite slowing growth in Asia and a spending slowdown in Europe, eBay managed to rapidly grow its online marketplace business during the quarter. This was due to many quarters of site improvements, which are making it easier to navigate the site,  and more seller-friendly. Gross merchandise volume grew by 14% in the U.S. during the quarter, to US$6.24 billion (excluding auto sales), easily surpassing Wall Street’s expectations, and jumped 8%, to US$9.93 billion, internationally.

The really exciting potential, however, lies with eBay’s expansion into mobile platforms, and the possibilities for growth with PayPal. Total PayPal accounts jumped 13% during the second-quarter to 113.2 million.

But, not even socially diverse companies like eBay come without their own set of concerns. The possibility of taxing online sales has been a concern for some time for both eBay and its online marketplace rival, Amazon.com (Nasdaq: AMZN). The  benefit of not paying taxes with online purchases is what drives such strong online marketplace growth.

Also, competition among mobile payments operators is increasing and threatening to unseat PayPal as the dominant party. Privately-held Square recently struck a deal to be the credit and debit transaction processor of choice for Starbucks (Nasdaq: SBUX), pushing on PayPal to innovate rapidly. eBay and PayPal have responded by orchestrating a potential blockbuster deal with McDonald’s (NYSE: MCD). As of now, PayPal is testing the mobile payment concept in 30 McDonald’s stores in France.

How it stacks up
Let’s see how eBay stacks up next to its peers.

EBAY Chart
EBAY data by YCharts

As you can see, eBay and Amazon’s performance prove that success in the online marketplace isn’t easy …  just ask Overstock.com (Nasdaq: OSTK) shareholders.

Company

Price/ Book

Price/ Cash Flow

Forward P/E

Net Margin (ttm)

eBay 3.2 19.6 17 28.7%
Amazon.com 14.5 34.4 69.7 0.7%
Overstock.com 11.3 10.3 N/M (0.8%)
Source: Morningstar.

What we have here is a two-way race between eBay and Amazon, with the two companies taking very different paths to mobile and social media success. eBay is banking on its mobile payment system PayPal to catch on with large businesses, and be the premier growth driver over the next decade. Amazon, which has chosen to fully invest its earnings back into its network, has expanded outside of its traditional marketplace offerings (books and electronics), and has focused more towards providing digital content and enterprise cloud services. Both paths seem likely to succeed, but the metrics here paint a very different picture about these two companies.

Overstock, on the other hand, continues to put the “O” in “overvalued.”  Its second-quarter results showed vast improvement over the previous year, but it continues to see weak traffic. It just can’t compete with the likes of eBay or Amazon.

What’s next?
Now for the $64,000 question: What’s next for eBay? That question depends on how effectively it monetises its mobile marketplace users, if it can secure big contracts for PayPal while fending off Square and other competitors, and if government regulators decide to tax online transactions.

Like Amazon, eBay is in the sweet spot of the mobile revolution. PayPal is the premier name for online payments now and, given its generally strong track record, there’s little reason to believe it won’t be a preferred choice when retailers begin to include mobile platforms within their stores. eBay’s investments in its online marketplace are also finally beginning to reap solid rewards. Its double-digit merchandise volume growth in the U.S., in spite of weak consumer spending, is a testament to this. As long as online taxation of marketplace sales remains off the table, eBay will remain a strong buy.

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The Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Sean Williams, originally appeared on fool.com

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