eBay Inc’s Earnings Were Good, but There Are 2 Things You Must Consider

eBay's (NASDAQ: EBAY  ) earnings were fairly strong, beating expectations on the top and bottom lines. Yet, shares have since fallen nearly 4%, meaning that many might be looking to buy the stock. Albeit, there are two things you should consider before buying eBay right now, and these involve Amazon.com (NASDAQ: AMZN  ) , Zulily (NASDAQ: ZU  ) , Apple (NASDAQ: AAPL  ) , and Facebook (NASDAQ: FB  ) .

A look at eBays quarter
eBay is broken down into two segments, marketplace and PayPal, which combined create its fundamentals. In the first quarter, total revenue grew 13.6% to $4.26 billion, and marketplace grew 10%, accounting for 56.5% of total sales .

PayPal's revenue rose 19% as volume increased 27% to $52 billion. eBay also finished the quarter with 148 million total PayPal accounts, a 5.8 million rise over the fourth quarter. Lastly, its net earnings finished the quarter at $899 million, most of which is tied to PayPal.

Hence, at first glance it looks like a great quarter, and the weakness, a reason to buy. However, you need to consider two points before buying the stock.

#1. The marketplace isn't carrying its weight
Marketplace's 10% growth may look ok, but it's a continuation of a recent trend of decelerating growth. In the fourth quarter, marketplace grew 12% and then 12%, 13%, 13%, and 16%, respectively, in the four quarters prior.

Essentially, the competition landscape in becoming more difficult to manage, and eBay still has to compete with the juggernaut Amazon. Notably, Amazon's revenue grew 22.8% in its last quarter, much faster than marketplace and signaling that Amazon stole market share.

Also, Amazon's growth was consistent with its last five quarters, and even an acceleration over its 20.3% clip in the fourth quarter. Thus, with Amazon shares 25% off their highs, it might be a good time to buy.

Then, if Amazon weren't bad enough, there are newer companies such as Zulily that are making a dent in the space. While its $695 million in annual revenue is small in comparison to eBay, its 100% growth means that it could soon become another force for eBay's marketplace to compete against.

Furthermore, Zulily has become a threat by buying merchandise from retailers in bulk, then selling to consumers at discounted prices. This approach has built quite a loyal following, consumers who could be shopping on eBay's platform. Therefore with it being 35% off its highs, it too might present an investment opportunity.

#2. PayPal's time alone has ended
With marketplace lagging, PayPal is the value creator and driver of eBay. The company has had the privilege of dominance and a lack of competition in the payment processing space, but not anymore.

The social media giant Facebook is launching an electronic money service, which reportedly is similar to PayPal, and may even be regulated. Currently, the company is in discussions with the Central Bank of Ireland to allow customers to store, pay, and exchange currency through its platform.

In retrospect, most businesses are already on Facebook or advertise through its platform, meaning a payment system shouldn't be hard to integrate, thus giving consumers the ability to purchase goods through Facebook both on and off its site. This could be a significant value creator for Facebook, and with 1.3 billion monthly active users, it could be catastrophic for PayPal.

Also, a couple of weeks ago re/code reported that Apple is interviewing senior-level management for payment processing. The Wall Street Journal broke news that the company was acquiring patents related to the technology.

Like Facebook, Apple has a large user base, most of whom already have credit cards on file in iTunes. Therefore, with Apple's 600 million users combined with Facebook's user presence, PayPal could quickly become a third-place payment processing service.

Final thoughts
Admittedly, eBay's quarter was good, but it might be wise to wait before buying the stock.

Amazon continues to steal market share, while the rise of companies such as Zulily poses a threat to the continued growth of eBay's marketplace. But more importantly, PayPal has real competition, and it's this segment that's driving growth and creating bottom line profits. Hence, with these segments in jeopardy, so is eBay's business.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 05, 2014, at 5:55 PM, NobodysFool2011 wrote:

    Zulily shouldn't be a threat to eBay marketplace as it's only brand new merchandise for mothers and infants, but eBay CEO John Donahoe decided to kill off antique and vintage markets that built eBay in favor of big box.

    The real damage to eBay comes from sites like Etsy, RubyLane, Discogs, etc who have siphoned off person to person sales of used, collectible and vintage.

    eBay should have focused on their existing customer base and fixed glitches that have plagued the site for years instead of trying to copy Amazon.

    Ask any merchant who has used eBay as a sales channel over the last decade what they think? If they have not pulled out of eBay entirely, most have limited exposure and will state constant fee increases, eBay's micro-management of sales and an overall lack of direction as weaknesses that have crippled eBay.

    Finally, eBay's management team just don't seem to realize gouging and purging small sellers results in those people spending money elsewhere.

    Maybe CEO John Donahoe needs to spend a few of his "thinking days" actually thinking aboutwhat eBay really represents to people.

  • Report this Comment On May 05, 2014, at 9:23 PM, PhilipCohen wrote:

    And what does the "smart money" on Wall Street think about eBay? Well, in August 2007, prior to the GFC, when the "Pain From Bain" was already effectively in control of eBay, the share prices of eBay and Amazon were both ~$40; with eBay recently ~$52 and Amazon ~$300, clearly, Wall Street (still) considers eBay to be a "dog", and Johnny Ho to be a very poor dog handler ...

    eBay Inc, where the incompetent mingle with the malevolent and the criminal …

  • Report this Comment On May 06, 2014, at 4:46 PM, NobodysFool2011 wrote:

    Correction Philip, eBay is at 50.95 as of today's sell off.

    Want to know what's wrong with eBay? Just head over to their Community Discussion boards and go into the Seller Central board. A quick glance shows topics such as :

    My Seller Account Restricted

    Fed up with ebay

    listing editing page quot jumps quot up and down

    Buyers not paying

    Note : all these horror story topics are being posted by veteran eBay merchants with thousands of feedback and most with over a decade selling on eBay.

    This isn't a ruse or a poke at eBay, the truth is Warren Buffett always says "Do business with a company before you invest in them" ~ Anybody even thinking about investing in eBay needs to try selling something there, call customer service for some minor issue, then see who they obfuscate the fee structure to the point you need to be an MBA to decipher it and you'll see why eBay has no future under current management.

    Hopefully shareholder will force some action in the near future as many, many people depend on their eBay business to feed their families.

  • Report this Comment On May 06, 2014, at 7:18 PM, PhilipCohen wrote:

    NobodysFool, you'll get no argument from me about what your views of eBay; that why I use the sign off my comments with ...

    "eBay Inc, where the incompetent mingle with the malevolent and the criminal"

    "eBay / PayPal / Donahoe: Dead Men Walking"

    bit(DOT)ly/11F2eas

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