eBay (NASDAQ: EBAY ) has fallen by more than 10% over the last two months, and the stock has been basically flat since the beginning of 2013. Amazon.com (NASDAQ: AMZN ) is outgrowing eBay in e-commerce, but PayPal is still generating tremendous growth for eBay in digital payments. Is the decline in eBay a buying opportunity, or should investors stay away from the company?
eBay vs. Amazon in e-commerce
When it comes to e-commerce, competing against Amazon is no easy task at all. Amazon has built a rock-solid competitive position in the industry based on aggressively low prices for its products and an efficient customer service, even if that means operating with minuscule profit margins. Amazon is all about growth, market leadership, and innovation.
Amazon announced a big increase of 23% in total sales for the first quarter of 2014 to $19.74 billion. Product sales, the segment which competes more directly against eBay, grew by 18.3% to $15.7 billion in the quarter.
Importantly, management said in the earnings press conference that "Prime subscribers continue to grow week over week" in spite of the recently announced price increase for the service. This is a crucial factor for Amazon, since Prime is an enormously valuable strategic asset for the company in terms of customer loyalty and competitive strength.
eBay is not growing as rapidly as Amazon in e-commerce, but that doesn't mean the company is stagnant in that area. eBay announced an increase of 9% in Marketplaces revenues on a currency neutral basis during the first quarter of 2014 to $2.2 billion.
Marketplaces gross merchandise volume grew by 12% versus the same quarter in the prior year, and the company gained 4.7 million new buyers to end the quarter with 147 million active buyers in its Marketplaces operation, up 14% versus the first quarter of 2013.
While Amazon operates with razor-thin profit margins, eBay produced a segment margin of 39.7% in Marketplaces during the first quarter. This was down by 240 basis points versus the same quarter in the prior year, but still materially better than the lackluster profit margins generated by Amazon.
PayPal is booming
PayPal has been a major growth driver for eBay over the last several years, and the segment continues growing at full speed. Payments revenues increased by 20% on a currency neutral basis to $1.8 billion during the last quarter.
PayPal net total payment volume increased by a remarkable 26% on a currency neutral basis to $52 billion, and it gained 5.8 million new accounts during the quarter for a total of 148 million active registered accounts at the end of the period, an increase of 16% versus the same quarter in the prior year.
It's important to keep in mind that PayPal is becoming an increasingly bigger part of eBay's business as it outgrows its other segments. Growing at approximately double the growth rate of Marketplaces, it's only a matter of a relatively short time until PayPal overthrows Marketplaces as the biggest business segment for eBay, and this could have positive implications for the company in terms of total growth rates.
Bringing the money home
eBay has decided to repatriate $9 billion in overseas cash, even if that means paying a huge tax bill of $3 billion to bring home the remaining $6 billion. The company has recently announced a big buyback program of $5 billion, so part of that money will probably be used to finance repurchases, but it will still leave ample room to maneuver as eBay generated $968 million in free cash flows during the last quarter alone.
Management said in the earnings press conference that the company wants to maintain flexibility when it comes to both buybacks and acquisitions.
Just to be clear, we are not announcing any large U.S. based acquisition nor are we committing to finance our share buyback with offshore cash. What we are doing is ensuring we have the capital available for U.S. needs.
However, it sounds unlikely that eBay would be willing to pay such a big tax bill only for flexibility's sake, so it should come as no big surprise to see increased activity from eBay on the acquisition front in the coming months.
This is always a source of uncertainty for investors. However, if smartly done, acquisitions can also be materially productive when it comes to return on capital and strategic position.
eBay is not growing as fast as Amazon in e-commerce, but the company is still generating solid performance in that segment when it comes to both sales and profitability. PayPal is an explosive growth driver for the company, and cash repatriation could open the door for more opportunities via acquisitions in the coming months. The company is well positioned for growth, so the recent dip in eBay could provide a buying opportunity for investors.
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