The economics of eBay's (EBAY 0.43%) business have evolved rapidly. The company is increasingly transitioning from its core e-commerce platform toward a major payments platform that enables huge volumes of transactions. eBay trades at a sizable discount to its intrinsic value, which represents an opportunity for solid upside potential.
Strong financial footing
The company's revenue grew 14% year over year to $4.26 billion, and operating income stood at $878 million. In the last quarter, eBay paid $3 billion in provisional taxes related to the repatriation of $6 billion of foreign cash. Management also cited bigger domestic growth opportunities in terms of acquisitions and investments as a reason for repatriating the cash and paying the sizable tax.
The e-commerce giant has seen steady growth in its user base, and its payments business is seeing rapid adoption as well. eBay utilized $1.8 billion to buy back shares in the last quarter. The company's free cash flow stood at $968 million, which represents a 52% year-over-year increase.
eBay's total enabled commerce volume increased 24% year over year to $58 billion, of which 19% came from mobile devices. Cross-border trade stood at $13 billion, which has the potential to increase significantly down the road as the company gets larger international merchants on its platform.
The take rate, or service fees the company charges, stood at 7.3% in the first quarter of 2014, which was a slight decline from the prior quarter's rate of 7.4%. This decline is caused by rapidly growing PayPal, which has a much lower take rate of 3.55% compared to eBay's marketplaces business.
Management cited that PayPal's take rate has been on the decline due to the big volume of transactions being conducted by large merchants. However, as long as PayPal continues to process significantly large payments transactions in the future, slightly lower fees wouldn't be a bad thing.
PayPal growing rapidly
PayPal is gaining a lot of consumer acceptance, and usage has outstripped the growth of eBay's core marketplaces business. The 148 million PayPal users employ the service to conduct substantial volumes of transactions. In the last quarter, total payments volume stood at $52 billion, a 27% year-over-year increase.
PayPal's revenue grew 19% year over year to $1.85 billion, and this growth should continue in the future. The company is investing heavily to grow the adoption of PayPal among users and large merchants, and is even accepting lower fees and offering credit through its Bill Me Later division.
In addition, PayPal acquired Braintree to accelerate revenue growth from mobile payments. Braintree processes more than $12 billion in transactions annually, and having such a company in PayPal's portfolio will drive total payments volume going forward, especially on mobile.
Robust merchandise sales
eBay's merchandise sales have been growing by double-digits for a long time, and are likely to continue in the future. In the last quarter, eBay's gross merchandise volume, excluding vehicles, grew 12% year over year to $20.5 billion. The company's customer base in its marketplaces business grew 14% year over year to 145.1 million, and continued additions in new customers will aid merchandise sales.
In 2013, the company's top three categories have been home and garden, clothing and accessories, and parts and accessories. These three comprised 14.2%, 10.8%, and 10% of eBay's total gross merchandise volume in 2013, respectively. eBay continues to move toward a fixed-price platform, instead of remaining an auction-based platform, as 76% of items were fixed price items, and this trend is likely to be ongoing in the future.
The company provides a more compelling value proposition to sellers relative to its e-commerce peer, Amazon (AMZN 0.21%). eBay doesn't sell its own products, unlike Amazon, which sells products from third-parties, as well as products from its own inventory. In the process, Amazon must compete with its merchants in terms of pricing.
Going forward
The company has a big foothold in cross-border transactions, and is increasingly growing its presence in emerging markets. PayPal's revenue growth has been in the 19%-20% range for the last four or five quarters, and is likely to sustain that growth rate. PayPal is becoming immensely valuable, as it was used in 2013 to process $180 billion worth of transactions. eBay's other business units are seeing good growth as well.
eBay trades at a forward P/E of 15.2, much lower relative to Amazon, which trades at 91.6. In addition, eBay has $3.8 billion remaining in its share buyback program and has Carl Icahn as an investor. The company is a high-quality name and its stock should see higher multiples in the future.
