eBay's (NASDAQ:EBAY) earnings report for the third quarter tells a story of two different businesses. While PayPal is delivering remarkably solid performance, the Marketplaces division is going through a challenging period.
These considerations are more important than ever now that the company is spinning off PayPal, so let's go through eBay's latest earnings conference call to try to find out what the future may bring for investors in eBay stock.
PayPal is firing on all cylinders
PayPal is a major growth driver for eBay, and performance during the third quarter of the year was nothing short of impressive. Growth rates remain notoriously vigorous, even accelerating in comparison with the second quarter. According to CFO Bob Swan:
PayPal had a great quarter. Revenue reached $1.95 billion, accelerating 1 point to 21% on an FX -- foreign exchange -- neutral basis driven by acceleration at merchant services. A few quick highlights on PayPal operating metrics: Total active accounts growth was 14% with rising engagement per account. TPV -- total payment value -- on an FX neutral basis grew 28%. Merchant Services FX neutral TPV accelerated four points to 37%. Transaction margin remained well above the 60% level while we continue to expand off of eBay, grow large merchant ubiquity and accelerated Braintree growth with merchants and consumers.
Marketplaces is disappointing
The Marketplaces division, on the other hand, is going through a difficult time. The business has not fully recovered from a cyber attack that caused eBay to make all its users reset their passwords in May, in addition, a new search algorithm from Google (NASDAQ:GOOG) is having a negative impact on SEO traffic.
President and CEO John Donahue admitted that Marketplaces results were below expectations:
Turning to eBay Marketplaces. This is a great business that has tremendous opportunities in a growing addressable market with healthy margins and strong cash flow. However, without a doubt, eBay is clearly facing some near-term challenges. Its growth is neither what we wanted nor what we expected. For the third quarter, global GMV -- gross merchandise value -- grew 7% on an FX neutral basis and revenue
Increased marketing spending
eBay increased its marketing spending to foster the recovery of its Marketplaces business in the third quarter, and management is planning to accelerate spending even more during the fourth quarter. In the short term, this will most likely generate pressure on profit margins, since marketing spending is not usually recovered through increased sales on a quarterly basis.
On a longer time-frame, however, this is not necessarily a bad thing for investors. If eBay spends its marketing money wisely, it could ultimately strengthen the brand and consolidate the company's competitive position. Swan said:
In our fourth-quarter guidance, we are anticipating fairly significant sales and marketing spend in our marketplaces business. We spent dramatic acceleration in Q3 and we'll continue to accelerate that level of spend in Q4.
eBay and PayPal will remain friends after the split
There are some clear synergies between Marketplaces and PayPal. Although the details of the separation remain to be known, management intends to maintain a solid collaborative relationship between the two businesses. From Swan:
Marketplaces has been a source of new users for PayPal in the past, so we want that to continue. Marketplaces has been a place where PayPal has been able to launch its innovations to drive higher penetration of PayPal on eBay, to drive consumer credit growth on eBay, to drive SMB credit on eBay more recently and to drive mobile payments on eBay.
So, we have new users, we have PayPal innovations and then lastly we have data. And the sources of data that eBay benefits from PayPal and vice versa have made the company stronger because of those relationships with each other. The intent of the operating agreements is simply to capture those benefits going forward, to minimize any [dis-synergies] (sic) associated with the separation, while also giving the individual businesses the inherent flexibility to compete and win in their respective markets.
Playing nicely with both Google and Apple
The mobile payments market is becoming increasingly competitive lately, especially as tech giants such as Google and Apple (NASDAQ:AAPL) are making inroads with initiatives like Google Wallet and Apple Pay, respectively. PayPal is accepted by Google Wallet, so eBay seems to be covered in that area. When it comes to Apple, management sounds quite open to the possibility of making alliances, too.
This is probably the smart thing to do, as the mobile payments business will most likely generate enormous opportunities for growth over the long term. By joining forces with powerful tech juggernauts such as Apple and Google, eBay is securing its ability to participate in these opportunities, even if it means having to make some concessions along the way.
We've been working hard to make sure that PayPal can be an effective form of payment inside of Google's ecosystem. And as you said, I think we've made some nice progress on that, it's going well. And with respect to Apple, Apple has always been an important partner of both eBay and PayPal and it remains to be seen. We're hopeful but we will work toward whatever is right in the months and years ahead.
Andrés Cardenal owns shares of Apple and Google (C shares). The Motley Fool recommends and owns shares of Apple, eBay, and Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.