Second Quarter Earnings Don't Tell Me What I Need to Know About eBay's Growth

07/17/2014 5:27 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Despite disappointing guidance, shares of this Internet auction powerhouse gained 0.6% to $51 a share at today's close, but stiff competition in a crowded and ever growing sector still has MoneyShow's Jim Jubak cutting his target price as of today, July 17.

Wall Street has decided to give eBay (EBAY) a pass this quarter.

After the market close on Wednesday, July 16, eBay reported earnings of 69 cents a share, a penny above Wall Street estimates, on revenue of $4.37 billion (up 12.6% year over year and just slightly below the analyst consensus of $4.38 billion.)

But the company also cut guidance for the third quarter, projecting earnings of 65 cents to 67 cents a share versus the 71 cents a share consensus of Wall Street analysts on revenue of $4.3 to $4.4 billion (versus the Wall Street estimate of $4.42 billion).

Despite that disappointing guidance, shares of eBay gained 0.6% to $51 a share at the close on July 17.

Oddly, it looks like a data breach in May that gave hackers access to login info and led the company to request users to change their passwords and changes to Google's (GOOG) search software that cut traffic to eBay and some other e-commerce websites helped eBay's shares. Investors knew going into the quarter that eBay would take a hit to revenue from its marketplace due to these two problems. And they've been willing to call that hit a short-term glitch and focus instead on continued growth at PayPal and the growth potential in marketplace revenue from the rollout of the company's own improved search software Cassini.

Net total payment volume at PayPal grew by 29% to $55.05 billion. The Wall Street consensus called for $53.09 billion. (Net total payment volume is a measure of the value of transactions handled by PayPal.) PayPal added 4 million new active accounts to finish the quarter at 152 million, up 15%. PayPal revenue for the quarter climbed to $1.95 billion, up 19.8% year over year.

On the marketplace side, it was largely a quarter (once you looked past the security breach and the change at Google) of waiting for Cassini. That search software is designed to improve eBay's own search so that it produces fewer of the off-target results that had plagued eBay merchants. Cassini's rollout was complete in January but, as you'll see if you check the blogs designed to help merchants sell on eBay, users of the eBay marketplace are still learning how to use the new search.

EBay gross merchandise volume grew by 12% in the quarter to $20.49 billion (versus the Wall Street consensus of $20.26 billion.) U.S. volume grew by 10% and international volume by 14%. Revenue climbed to $2.2 billion. Marketplace gained 3.8 million new buyers to end the second quarter with 149 million active buyers, up 14%.

There's no doubt that eBay is smack in the middle of two of the most competitive-and fastest growing--online segments. Everybody from big banks to Amazon.com (AMZN) and Google GOOG is trying to figure out how to grow their global e-payments business. With 152 million accounts PayPal has a substantial presence in this market-but its position is certainly not secure given the extent of the competition. In e-commerce, eBay not only has to compete with Amazon but with newcomers such as Alibaba. (Rumors on July 17 say that Alibaba has delayed its New York IPO until September.)

How successful will eBay be in that competition? Cassini is a good sign that the company, which seemed to be neglecting its technology infrastructure, is back to making the necessary investments in its marketplace. For PayPal, the question is if the company will be able to sign enough partnerships with retailers to drive growth and how quickly it can build its global presence.

The market is certainly big enough and the growth fast enough so that investors that pick one of the winners will make very attractive profits. I think we'll have a better take in the third and fourth quarter on how likely it is that eBay's efforts to be one of those winners will succeed.
As of July 17, I'm keeping eBay in my Jubak's Picks portfolio  but I'm cutting my target price slightly to $62 a share from the previous $65. At the close on July 17, the stock was off by 1.1% from the price at my April 22, 2013 pick.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.

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