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

Don't buy eBay just yet, increased competition in e-commerce and big tech are getting ready to spoil eBay's party!

May 5, 2014 at 4:30PM

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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Brian Nichols owns shares of Apple and ZULILY, INC. The Motley Fool recommends Amazon.com, Apple, eBay, and Facebook. The Motley Fool owns shares of Amazon.com, Apple, eBay, and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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