Don't Stress Over eBay's Earnings

eBay (NASDAQ: EBAY  ) reported its third-quarter earnings on Wednesday, and the results were more or less in line with expectations.

For the quarter, eBay reported revenue of $3.9 billion, translating to $837 million in net income, or $0.64 per share, excluding items. On the year, revenue increased 14% and earnings increased 17%, falling in line with consensus estimates. The Street expected eBay to bring in $3.9 billion in revenue and earnings of $0.63 a share.

Going forward, eBay expects fourth-quarter revenue to come in around $4.5 billion to $4.6 billion, slightly below analyst expectations of $4.64 billion. Coupled with the fact that eBay remains cautious going into the holiday season, shares traded down about 5% following the release.

Solid growth
During the quarter, eBay enabled $52 billion in commerce activity, representing an increase of 21% year over year. Mobile commerce skyrocketed 75%, aided by the help of 3.2 million new mobile app users. What's more, eBay's core marketplaces' revenues grew by 12% to $2 billion, and its active user base grew by 3.9 million.

On the payments front, PayPal increased revenue by 19% to $1.6 billion, grew its active user base by 5 million, and ended the quarter with 137 million active users. Additionally, net total payment volume grew 25% to $44 billion.

For a company that continues to report strong growth across its businesses, it's been frustrating to see the stock underperforming the S&P 500 over the last year.

EBAY Chart

EBAY data by YCharts.

Searching for answers
Although eBay delivered impressive top-line and headline growth, digging beneath the surface shows there could be cause for some concern. PayPal's take rate on transactions has been in decline over the last year, falling from 3.94% to 3.7%. This could be viewed as a bit problematic, considering PayPal remains eBay's fastest-growing segment and it could indicate that competitive threats in merchant services are putting pressure on eBay's longer-term pricing power.

In actuality, PayPal's take rate has been largely in decline due to the growth of larger merchants who qualify for volume discounts. Over the long term, having bigger merchant customers is a great trend for eBay's business, and therefore should not be viewed as an area of concern. Instead, investors should view a declining take rate as a testament to the power or PayPal's merchant offerings and its ability to grow and attract larger merchants.

Early innings
Although eBay is underperforming the market in the short term, I still believe there's tremendous opportunity for the company to outperform over the next decade. The company is well positioned to benefit from the rise of mobile services, not to mention the billions of Internet users expected to come online in the next three to five years. As a result, eBay expects to enable $300 billion in commerce by 2015, compared to $175 billion in 2012, representing only a fraction of what it believes to be a $10 trillion (with a t) worldwide addressable market.

Given these prospects and eBay's lofty ambitions, I'm happy owning shares for 26 times earnings.

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