1 More Thing to Consider Before Investing in eBay

If the growth of e-commerce-focused companies and new payment processing initiatives from big tech weren't bad enough news for eBay, the company has yet another threat.

May 8, 2014 at 11:00AM

eBay (NASDAQ:EBAY) might be a company that interests you, especially following its rather strong first-quarter report. However, several red flags surround this company, including the obvious growth of Amazon (NASDAQ:AMZN) and the likes of Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT).

Two key problems for eBay
In a recently published article, two major concerns were discussed as they relate to investing in eBay. These concerns revolved around increased competition from e-commerce peers, including companies that are stealing market share and growing significantly faster than eBay's Marketplace.

The second problem involved growing competition for PayPal from big tech companies with significantly larger networks that recently announced initiatives to enter the space. Given that much of eBay's value and profits are tied to PayPal, this could pose a major threat to the future performance of the stock.

With that said, "Ebay Inc's Earnings Were Good, but There Are 2 Things You Must Consider" can give you a thorough understanding of these looming problems. If this weren't bad enough, it appears there is another central problem that hurts eBay even worse.

The one, and obvious, problem that was missed
eBay's core Marketplace has become a laggard for the company, underperforming its total growth.

Over the last few years, Marketplace's year-over-year growth has decelerated rapidly, including a multi-year 10% decline in its most recent first quarter. Hence, with Marketplace accounting for $2.2 billion of the company's total first-quarter revenue of 56.5%, this deceleration becomes a major overhang for the company.

Amazon is also a main culprit for the decreased year-over-year growth and loss of market share for eBay's Marketplace. In Amazon's last quarter, it reported revenue of $19.74 billion with growth of 22.8%, clearly outpacing Marketplace with a 26% gain in North America.

Nonetheless, the problem for eBay's Marketplace stretches far beyond Amazon and into brick-and-mortar businesses that previously suffered as a result of eBay's success. These companies saw slowed growth in years prior due to the presence and growth of e-commerce and the nearly unbeatable prices from the likes of eBay and Amazon.

However, after watching eBay and company destroy revenue growth and force lower margins, brick-and-mortar companies are fighting back, especially Best Buy and Wal-Mart.

While Best Buy's comparable store sales fell nearly 1% last year, one bright spot was its online business. Last year, Best Buy's e-commerce business grew 19.8% on a comparable basis; it then showed increased strength as the year progressed. In the fourth quarter alone, comparable e-commerce sales rose 25.8% to $1.57 billion, meaning that e-commerce sales accounted for nearly 11% of total revenue.

Thus, e-commerce is becoming a serious piece of Best Buy's business, a real threat to eBay, and with Best Buy's growth being double that of eBay, it, too, is stealing market share. Therefore, at 0.21 times sales, and considering this growth, Best Buy might make a good investment. It's not unreasonable to imply that its e-commerce growth might one day soon carry its fundamentals.

With that said, Wal-Mart's e-commerce growth is even more impressive. Last year, the division grew 30% and created $10 billion in revenue. Obviously, this growth far exceeds Wal-Mart's 1.6% and 2.9% growth rate for last year and forecasted growth for this year, respectively. Albeit, $10 billion is just 2% of Wal-Mart's total revenue, but still an important element that is creating growth, stealing market share, and likely causing headwinds for the lagging Marketplace.

Final thoughts
New competition in the payment processing segment, combined with continued growth of pure e-commerce companies, is bad enough news for eBay. However, combined with growing e-commerce channels of traditional brick-and-mortar businesses, eBay has real problems.

Granted, this new problem of brick-and-mortar success could also hinder Amazon's ability to grow. However, the difference is that Amazon is not seeing decelerated growth and has Amazon Web Services growing at an annual rate of more than 50%. Therefore, with both of eBay's core businesses facing intense competition and rising threats, it's hard for me to justify a position in the company at this time.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. 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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