While the company may be seen as an “also-ran” compared to Amazon's online marketplace, the online auction and payment company (eBay owns PayPal) is becoming a leader in online business and payment processing. Investors may want to give it another look.
Here's the brief run down of what's going on with eBay stock:
- User Growth on the Marketplaces – eBay reported that active user growth on its online marketplace is keeping up with projections. In the fourth quarter of 2012, eBay reported having 112 million active users, up from 98.7 million in the same quarter of 2013.
- Sales Growth Continues – In the last year, 17.4% more products were sold than in the year ago period, which contrasts against the company's reputation as a slow-growing, ill-fitting online auction site.
- PayPal Processes More Payments – PayPal enjoyed a 24% increase in total payment volumes in 2012, helped by the fact that the payment company is embedded in eBay's online marketplaces and 16% of all checkout transactions elsewhere around the internet. Total payments in the fourth quarter of 2012 were $41 billion – a huge slice of online commerce.
Never before has eBay been so aggressive in competing with rivals. In the Marketplaces segment, eBay is taking on Amazon. The company plans to change its pricing to a simple percentage of the total sales price. Gone are listing fees and other flat charges, which one would be led to believe reduce the total sales volume on the Marketplace. I think this is a great move as a business, since no merchant wants to risk paying listing fees for products that do not sell. Additionally, I believe many merchants are simply turned away by complexity, especially casual sellers who might list only a few products once or twice per month – those who do not plan to make a business of eBay sales.
In payments, eBay's kicking up the competition with its PayPal unit. The company is testing PayPal payments at Home Depot and other major retailers, while it is also working to turn PayPal into a banking product through an agreement with Coinstar. PayPal is currently testing a new service that would allow individuals to make deposits and withdrawals from their PayPal account at any Coinstar location. In their testing, eBay learned that 40% of people who used the service once used it again, on average two times per month.
The company has completed a missing link in online sales. Once the Coinstar agreement goes nationwide, users will be able to list a product at no initial cost, deliver the product to be shipped to the customer, and then pick up their proceeds in cash at any Coinstar location. No other online marketplace has that feature, or the capacity to make such an exchange take place. Furthermore, eBay's agreement with Coinstar would make it a domestic competitor to services like Western Union, which allows individuals to send cash to another party seamlessly.
eBay's Profitability and Moat Deserve a Higher Multiple
The network effect is one of the strongest economic moats. In online retail, new entrants find it difficult to lure shoppers and sellers given that no one wants to be the only buyer or seller on a new exchange. In payments, eBay has a clear edge in working with Coinstar for online deposits and withdrawals, being the clear leader in payment processing for online freelancers and workers, as well as the leader in checkout volume at online stores.
At only 16x forward earnings, eBay looks cheap. The company has a current net cash position of just over $5 billion, putting its earnings multiple less cash at about 15 times forward earnings estimates.
Given the strength of the brand, a growing economic moat, and growing revenues from the online marketplace and payment processing, eBay should trade at a minimum multiple of 20x earnings. That would give it a total valuation 20% higher than where it trades today. Simply put, eBay is an above-average company trading at the average multiple of the broad S&P 500 index. That makes it worth a second look.
What are your thoughts on eBay and their growing payment processing business model?