eBay Ridiculously Cheap

eBay continues to struggle against current economic conditions with rather lackluster Q3 performance. They have reduced their Q4 guidance, raising doubts about a merry Christmas for the company this year.

Q3 revenues of $2.12 billion were marginally lower than the market’s expectations of $2.13 billion. Revenues increased 12% over the previous year. EPS of $0.46 rose 7% sequentially and 11% over the year. The Street was looking for EPS of $0.41.

Marketplace transactions brought in $1.38 billion, lower than the $1.5 billion contribution the previous quarter, and thus represented a consecutive sequential reduction. Revenue from this segment grew 4% over the year. Active users grew 3% over the year to 85.7 million, and new listings increased 26% over the year to 700 million.

PayPal grew at a much higher rate of 27% and contributed $0.60 billion revenue for the quarter with more than 65 million active user accounts. Skype’s user base also continued to increase by 51% over the year to 370 million and contributed $0.14 billion revenue.

During the quarter, eBay repurchased 25 million shares at a cost of $623 million.

eBay’s acquisition strategy also seems to be on a roll right now. They acquired a leading online transaction credit provider – Bill Me Later – to add to PayPal’s leadership position in online payments, for $945 million. Bill Me Later was previously a direct competitor to PayPal, which eBay acquired in 2002, and was being financed by its arch-rival Amazon. Bill Me Later already has over 4 million customers on sites like Amazon, the Apple Store, JetBlue and Walmart. For the year, it is expected to finance $1 billion worth of purchases with $125 million in revenues. The company is not yet profitable, however, and the acquisition will result in lower margins for eBay. It will be interesting to see what Amazon’s next steps will be following this acquisition.

eBay also announced the acquisition of Den Bla Avis, a Danish classifieds specialist, and a vehicle site, BilBasen, for $390 million in cash. They expect these acquisitions to strengthen their presence in Europe.

Despite their acquisitions, in view of the economic conditions they revised down their outlook for the full year to $8.525-$8.675 billion with EPS of $1.69-$1.71. For Q4, they revised the guidance to $2.02 – $2.17 billion while maintaining EPS guidelines of $0.39-$0.41.

With these acquisitions, eBay does seem to be finally moving somewhere directionally. Meg Whitman’s departure positioned the company for a turnaround, but John Donahoe was not taking full advantage of the opportunity. The strengthening of their payment business certainly seems like an astute move. It has been eBay’s greatest asset for a long time now, and over the next decade, I would not be surprised if eBay becomes more of a payment company than a marketplace.

I am still not bullish on the stock. They haven’t yet sold off Skype, and their user experience still leaves a lot to be desired.

The stock is currently at its lowest for the year, and lowest in the last five years, at $13.26. A year ago, it was trading at $40.67 – a 67% erosion of value. The market cap is around $18 billion. This can’t be fair!