The online auction business just isn't as lucrative as it once was. Digital seller eBay (NASDAQ:EBAY) was already having a tough year, having fallen 15% over the previous 12 months, as the company doubled down on its strategy to distinguish itself from other online marketplaces. Then things went from bad to worse: eBay's stock fell nearly 9% after former subsidiary and longtime partner PayPal (NASDAQ:PYPL) reported the financial results of its third quarter late last week.
eBay is scheduled its report to shareholders after the market close on Tuesday, October 30. Let's look at the company's most recent results and review what PayPal said that caused the precipitous decline to see if it provides any insight into what the future holds for eBay.
A brief refresher
For the second quarter, eBay reported revenue of $2.6 billion, up 9% year over year, but growing just 6% on a foreign exchange neutral basis. The company reported net income from continuing operations of $638 million, resulting in adjusted earnings per share of $0.53, up 18% compared to the prior-year quarter. eBay also reported a deceleration of both active buyers and items sold via its marketplace.
The muted results sent shivers through eBay investors, and the stock fell 11% immediately following the results, continuing to decline ever since.
eBay falls on PayPal report
There were several catalysts from PayPal's earnings release that conspired to take down eBay. The biggest contributor was a study commissioned by PayPal that revealed that customers were 54% more willing to complete an online transaction if PayPal was offered at checkout. The survey also showed that 59% of PayPal users have abandoned a transaction if PayPal wasn't listed as a payment option.
Those who have followed the two companies will recall that eBay announced earlier this year it would begin intermediating its own payments, in partnership with European payments processor Adyen, and gradually phasing out PayPal as the processor of record. eBay said at the time the move would lower costs and provide greater control for its merchants. This move away from PayPal may be costing eBay valuable sales -- at a time when it needs them most.
Another part of PayPal's report that spooked eBay investors was the revelation that eBay payment volumes grew just 3% year over year on a currency-neutral basis. Scott Devitt, an analyst with Stifel, pointed out that this figure is significantly lower than the 6% growth just last quarter, and far below the 7.2% growth his company was expecting.
Because PayPal still processes an estimated 75% of eBay's payment transactions, its financial report provides early insight into eBay's soon-to-be-released results. Devitt noted that eBay's actual performance over the three previous quarters has been within 1% of the numbers reported by PayPal, signaling that this will likely be another quarter of tepid growth for eBay.
Watch these numbers
For the third quarter, eBay guided for revenue in a range of $2.64 billion and $2.69 billion, which would represent growth of between 5% and 7%, excluding the effects of foreign currency. The company forecast diluted earnings per share of between $0.37 and $0.41 and adjusted earnings per share of between $0.54 and $0.56.
Analysts' consensus estimates are calling for revenue of $2.66 billion and adjusted earnings per share of $0.55 -- both very near the midpoint of eBay's guidance.
If PayPal's numbers are a reasonable approximation of what eBay is set to report, investors should brace themselves for the rout to continue. The stock has already lost more than a third of its value so far this year, and another quarter of slowing growth could lead to additional sharp declines.