With the spinoff of PayPal complete, eBay (EBAY -0.24%) is left with just its Marketplace business. The company has seen slower growth in active buyers across its portfolio of websites over the past couple of years, and gross merchandise volume declined in each of the first two quarters of 2015. Indeed, PayPal has been a strong growth driver at the company for years now, which is why it received a higher valuation after the spinoff.
Nonetheless, there are a few things to like about eBay post-PayPal. The Marketplace business is less capital-intensive, produces better margins than PayPal, and provides relatively predictable cash flows.
eBay sets itself apart from the competition
eBay has conceded significant market share of the online shopping business to Amazon.com (AMZN 1.04%), but eBay also operates much leaner than Amazon does, which can be beneficial for investors.
Amazon's business requires lots of overhead, such as buying products and storing them in warehouses. As a marketplace that simply facilitates commerce, eBay has much less overhead.
eBay's capital expenditures in each of the past three years has remained relatively stable while total revenue grows. Meanwhile, Amazon's capital expenditures continue to climb, and its operating expenses have soared faster than revenue. Some of those expenses are related to its cloud services, but Amazon famously operates with no profits.
Because eBay is mostly just a service, not a retailer like Amazon, the company produces significantly better gross margins. Over the past 12 months, eBay produced a gross margin of 68%. Comparatively, Amazon's gross margin is less than half that, at 30%.
eBay also keeps operating expenses low. Last quarter, the Marketplace business produced an operating margin of 36%. The now spun-off PayPal posted an operating margin of just 26%.
Consistent cash flow
eBay's Marketplace business is a consistent cash-flow generator. Last year, the segment generated about $2 billion in free cash flow for the company, and it expects to generate $2.1 billion to $2.3 billion in free cash flow in 2015.
eBay's percentage of free cash flow to revenue is higher than PayPal's, which explains why PayPal's balance sheet was loaded with cash in the spinoff. eBay kept just $1 billion in net cash, whereas PayPal has about $5.5 billion in net cash on its balance sheet. In all, this makes sense, since PayPal needs to invest more in its business and in acquisitions to stay ahead of the competition.
eBay on the other hand, can use its consistent cash flows to continue snatching up its stock. Scott Schenkel, CFO of eBay Marketplaces, had this to say during eBay's second-quarter earnings call: "While our focus is, first and foremost, on revitalizing our core business, our philosophy is that the capital return and disciplined M&A will be important to shareholder value as well. We will continue to be good stewards of capital and ensure we use a strategic and disciplined approach in all of our activities."
With its consistent cash flows, eBay can afford to take on even more debt and take advantage of the low interest rates available. It can use that money to buy up even more of its own shares or other marketplace properties.