Following the fourth quarter earnings announcement on January 18, more than half the analysts covering eBay Inc. (EBAY) have made downward revisions to their estimates. Decelerating gross merchandise volume (GMV) trend, inconsistent performance by the Marketplaces segment, European macro concerns, and intensifying competition could be the reasons for downward revisions.
Last Quarter Synopsis
eBay’s fourth quarter earnings excluding stock based compensation came in at 60 cents, better than the Zacks Consensus of 55 cents, aided by holiday-driven demand and strong top-line growth, partially offset by a higher tax rate.
Revenue in the quarter increased sequentially as well as year over year to 3.38 billion, exceeding the guidance range of $3.20-$3.35 billion. Both transactions-based revenue (up 14.2% sequentially) and marketing services revenue (up 12.3% sequentially) contributed to the revenue upside.
Gross margins increased 31 bps sequentially to 70.0% due to higher volumes, a favorable product mix and the positive impact of recent acquisitions.
Agreement of Analysts
Of the 15 analysts covering the stock, 8 made downward revisions for the upcoming quarter, with only 1 analyst moving upward in the last 30 days. Also, for fiscal 2012, 12 out of 18 analysts lowered their estimates, while 3 analysts increased theirs over the same 30-day time period. This indicates the negative sentiment of the analysts post fourth-quarter earnings.
Analysts, by and large, believe that eBay’s core business in the UShas been underperforming domestic e-commerce growth for some time now, which can now be seen in the key international markets as well, indicating market share losses.
They remain concerned about the relative weakness in merchant services total payment value (TPV) growth due to the continued negative impact from foreign currency and lack of recovery in the rate of cross border commerce, particularly in Europe.
According to the analysts, eBay’s continued investment in new technologies and acquisitions will likely lower margins in the coming quarters. Additionally, they believe that a combination of decelerating GMV growth and tough comps will likely limit operating profit growth in 2012.
However, a handful of analysts expect EBAY to deliver solid top-line growth, driven by strength in PayPal, and expectations of continued improvement in Marketplaces. They contend that the fundamentals of PayPal’s business will remain strong in 2012.
For the first quarter of fiscal 2012, eBay expects revenue in the range of $3.05-$3.15 billion, down 8.3% sequentially. Additionally, management expects total mobile payment volume to increase to $7 billion in 2012, aided by the Paypal Mobile Express Checkout system and Zong acquisition.
The consensus, as evident from the analyst agreement, points to weaker performance going forward.
Impact on Estimates
Over the 30 day period, the Zacks Consensus Estimate has fallen 3 cents for both the upcoming quarter and fiscal 2012 to 43 cents and $1.96, respectively. In the past 90 days, the Zacks Consensus Estimate fell 3 cents for the upcoming quarter but remained unchanged for fiscal 2012.
Conclusion
We believe that eBay is well positioned to not only expand its PayPal segment, but also grow its Marketplace business, both acting as positive catalysts for shares. We expect eBay’s Marketplace business to continue showing all signs of a turnaround, with Payments continuing to gain market share, both online and offline.
We remain impressed with eBay’s strategy and executionand believe that PayPal is well positioned for sustained growth. Starting from the fourth quarter, Paypal announced its initial Point of Sale (POS) test with Home Depot (HD), which was increased to 51 Home Depot stores. While this would widen PayPal’s addressable market, the success of these POS tests is still to be seen.
PayPal’s mixed funding sources between bank transfers, debit cards and credit cards, offers cheaper payment transactions than credit cards. We believe that this competitive advantage should drive penetration across the Internet and broadening mobile landscape.
However, we are concerned about increasing competition from major online retailers, such as Amazon.com (AMZN), as well as many other smaller players. Additionally, Google Inc. (GOOG) has been eyeing the online payments space, threatening eBay’s dominance. Google Wallet has the potential to become a predominant choice for users’ mobile payments given the relationship it has already forged with credit card giants such as Mastercard Inc. (MA) and other banks.
Currently, eBay has a Zacks #3 Rank, implying a short-term Hold recommendation.
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