In this segment of the Motley Fool Money podcast, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Hidden Gems Canada's David Kretzmann start by talking eBay (EBAY -3.90%): The e-commerce veteran's fourth-quarter revenue was up 9%, and all of its key numbers are rising nicely.
The guys look back on one big tactical blunder it made a couple of years ago, and consider what the company's future might hold. Then they turn to PayPal (PYPL -5.42%), which had a good fourth quarter, but got dinged for a minuscule guidance reduction. Was the market's reaction justified?
A full transcript follows the video.
This video was recorded on Feb. 2 2018.
Chris Hill: Strong fourth quarter for eBay. Revenue for the holidays up 9%, and the stock, Matty, was up more than that.
Matt Argersinger: It was a strong quarter. I have to admit, after eBay spun off PayPal a few years ago, I started ignoring eBay, just because the revenue had kind of flattened out, I knew they were losing a lot of users.
Hill: You're not the only one. Don't feel bad.
Argersinger: OK, good. But, just catching up with the company now, it's very impressive. As you mentioned, revenue up 9%. Active buyers across all of eBay's platforms up 5% to 170 million. I didn't even know that number was that high. And marketplace gross merchandise volume, key figure for eBay, climbed 9% to $23 billion. StubHub gross merchandise volume up 16%. I think eBay has always been a highly profitable business. They generated almost $1 billion in operating cash flow, of course buying back a ton of stock. I know that eBay ceded the e-commerce throne to Amazon many years ago, but I have to say, it's impressive to see the business growing this nicely. The users they have, the cash they're generating. I'd be remiss if I didn't mention this, though --
Jason Moser: I know where he's going with this. [laughs]
Argersinger: Back in October 2016, let's say 16 months ago, they sold their 18% stake in MercadoLibre for around $168 a share.
Hill: How'd that work out?
Argersinger: Last I checked, MercadoLibre shares are around $375.
Moser: No bueno, Chris.
Argersinger: That decision alone cost eBay, at this point, about $1.5 billion and climbing. Not to mention a foothold in Latin America, which I think could have been a nice growth market for eBay. And that kind of always casts a pall when I start looking at eBay.
David Kretzmann: Yeah, I think you have to look at eBay as a slower and steady business. They have a pretty decent core business, as Matt highlighted. Last year, they generated about $2.5 billion in free cash flow. But part of me wonders how long eBay will be an independent company. I think this could be an attractive acquisition target for Alibaba (BABA -1.66%), which is just swimming in cash at this point, might be looking to make a bigger push into the U.S. and North America. And that would be some sweet vindication on Alibaba's part, because they really had some fierce competition with eBay in China last decade. So, that'll be kind of coming full circle with the competition there.
Argersinger: Yeah, I think that's a great point. Alibaba is looking to make inroads, and that would be a natural fit for Alibaba's business.
Hill: Shares of PayPal fell 10% on Thursday after fourth quarter results were followed by lowered guidance for 2018. Help me out, Jason. The quarter was good, and they lowered guidance by the tiniest amount. How much of an overreaction was this?
Moser: I was just thinking about what David said. Swimming in cash. That paints a nice picture. That's a bucket list thing, swimming in cash one day.
Moser: Listen, I think PayPal's network and utility extend so far beyond eBay at this point that I wouldn't really put much concern in this at all.
Hill: Yeah, this was part of eBay's announcement, "Oh, by the way, PayPal is still on our platform, it's no longer the go-to payment on our platform."
Moser: Exactly, and this wasn't a surprise, either. And it's something that's occurring over time. It's not like tomorrow, they're just going to hit a switch. But, COO Bill Ready noted also, and this is a good point, retail partners tend to have multiple payment providers, and that's not going to change. PayPal is typically one of those payment providers. And interestingly enough, because of the network, because of the data, because of the fact that this is a trusted brand that many people use, the conversion with PayPal clients tends to be twice that of the other providers that are jumping into the space. All in all, it's just to say that PayPal users tend to make these businesses more money, therefore PayPal remains an attractive partner. This volume was going to come down over time, just as PayPal grows. To put it into context, payment volume tied to eBay this quarter was 13%, vs. a year ago at 16%. That number is going to keep on coming down. But the network, they have 227 million active accounts now. Engagement is up, more payments going through on a yearly basis per active account. And I think most importantly, PayPal has earned a reputation of trust in this business, which I think is crucial.
Argersinger: Yeah. If this had happened a couple of years ago, I'd say it would be a little more worrisome for PayPal. But, even if you look at the tens of millions of sellers on eBay who now have this other option, they're probably selling stuff at other sites where they're using PayPal. So, the fact that it's now a default option, I don't think that takes too much share from PayPal on eBay.
Hill: Don't you think part of what we saw was some of the stocks dropping this week is people taking profits? Here are three very different businesses. PayPal, whose stock has doubled in the past year. Microsoft, shares up 50% in the last year. McDonald's, shares up more than 40% in the last year. All putting up really good numbers. I don't begrudge anyone for maybe taking a little money off the table, but that has to be at least part of what we're seeing in these cases, isn't it?
Moser: I think it definitely is. In PayPal's instance, I think, if we even consider about a one billion-dollar tailwind they're going to feel on the free cash flow side with this Synchrony deal, even with that accounted for, the stock was trading at somewhere in the neighborhood of 35X free cash flow. That's expensive. There's no question about it. This sell off, not a terribly big deal, and it really just kind of brings the stock back to reality.
Argersinger: In most cases, a lot of these companies have grown up so much that even with this week's sell-off, for a lot of these companies, they're back to where they were maybe a month or two ago.
Moser: Don't worry, Chris, the war on cash continues.