If you just woke up from a long nap that started in October 2007, things would look eerily the same, at least if you followed tech stocks. In fact, Wednesday the Nasdaq 100 was literally within pennies of its 2007 pre-Lehman Brothers highs before closing a little lower. The market's relentless move to these lofty levels has left investors with little choice with regard to value when it comes to investing in technology names. However, one former tech favorite has not yet come close to recovering its losses from the crisis and still has growth potential that is intriguing.
A slowing marketplace
I'll admit eBay's
eBay has been on a bit of a buying spree of late in hopes of keeping up with the joneses or Amazon at least, but the acquisitions seem strong on the surface. Just last week, eBay bought brands4friends, the largest online shopping club in Germany, for nearly $200 million in cash. These online clubs make up about 20% of the total online fashion sales in Europe. The acquisition will give eBay a much-needed boost in Europe where brands4friends has more than 4 million users throughout Germany, Japan, the U.K., and Austria. Amazon purchased brands4friends rival BuyVIP in October, a rival site with about 6 million members.
Earlier this month, eBay also acquired local shopping and product inventory site Milo.com for $75 million in a deal that I think makes even more sense for the company. Fellow fool Rick Munarriz calls Milo the anti-Amazon because for the most part it sends customers to local merchants to make their purchases.
The acquisition will allow eBay to rapidly expand its footprint in local commerce at a much lower price than Google was willing to pay to grow its local footprint with its attempted acquisition of Groupon. Research firm Forester believes that online research to offline buying will account for more than 50% of total retail sales by 2013, generating about $1.3 trillion. eBay also has a leg up over Google in this market because it serves as an actual e-commerce platform while consumers don't yet view Google in the same light.
While the dominant days of eBay's e-commerce marketplace may be in the rearview mirror, the real star of this company is PayPal. While its online payment platform is certainly affected by a slowing eBay e-commerce marketplace, the company has been steadily growing its relationships with other leading e-commerce sites such as Southwest Airlines
An even bigger growth engine for PayPal could be its relationship with Facebook, and its more than 500 million users. In September, the company unveiled its new micropayments product for digital goods, which is being touted as having the seamlessness and simplicity of dropping a quarter into an arcade game. This will allow consumers to purchase games, music, videos, etc. in just one or two clicks without ever having to leave Facebook or another merchant's site.
Facebook is expected to generate more than $835 million in revenue for eBay in 2010. Even more important is the vast number of users and potential customers who are exposed to PayPal through the social networking site, which could create substantial revenue growth for the company.
Even though the recent acquisitions are sure to help grow eBay's e-commerce business, in the upcoming few years the company should continue to see the majority of its growth from its PayPal unit. However, as revenue from PayPal continues to be a larger part of eBay's total mix, investors can expect the company's profit margins to get smaller. This year, payments have been about 37% of eBay's total revenue, but that is expected to grow closer to 50% over the next few years. The margin story is one to watch, but I believe lower profit margins are largely priced into the stock. More important is the integration of its acquisitions and the continued growth and acceptance of PayPal, which looks to be on track.