Not Bullish on eBay

I said earlier upon Meg Whitman’s departure that eBay has a bounce back opportunity ahead. As their new CEO, John Donahoe, announced Q1 results today, they exceeded market expectations on all counts. Q1 revenues of $2.19 billion and EPS of $0.42 were higher than analysts’ views of $2.08 billion revenue with $0.39 EPS.

Segment wise, Marketplace revenues grew over the year by 19% to record $1.48 billion. Sequentially, revenues from the segment were down by 1% primarily as holiday season makes Q4 a stronger quarter. PayPal revenues of $582 million were 32% higher over previous year Q1 and 3% higher sequentially. Skype revenues of $126 million recorded an impressive 61% growth over the year and 9% over the quarter.

Region wise, America’s revenue increased by 16% over the year and was down 1% sequentially. International revenues recorded an impressive 32% increase over the year and 2% increase over the quarter.

In terms of key metrics, Active users on the Marketplace segment recorded a marginal increase to 83.9 million from 83.2 million in the previous quarter. New listings increased by 10% over the year to reach 647.4 million and the number of eBay stores increased by 13% over the year to reach 547,000.

PayPal’s 60.2 million active accounts increased 17% over the year and Skype added 33 million users to reach 309 million accounts.

During the quarter, they repurchased 37 million stock at a cost of $1 billion.

Going forward, they expect Q2 revenues to be in the range of $2.1 – $2.5 billion and EPS of $0.39 – $0.41. For the year, they raised their outlook to $8.7 – $9.0 billion with EPS of $1.70 – $1.75.

During the quarter, they acquired Fraud Sciences, an Israel based company with expertise in online risk tools to help enhance PayPal’s proprietary fraud management services.

There are several things that are still going unaddressed with eBay. For starters, their customer experience is not improving to become a truly Personalized experience. Their Reviews are still not well-integrated to where the products are showcased or listed, offering a fragmented user experience, although some moves have been taken to improve the feedback process. Further, they are still dependent on Google for customer acquisition.

I expect their new CEO to take steps into fixing these issues over the rest of this year. eBay has rebalanced their pricing model to encourage greater selection and to align their success with that of their sellers. But eBay still does not know me like Amazon does.

Skype is doing well in terms of actual numbers and growth, although it has cost eBay dearly in terms of write-offs. I said earlier that eBay should sell this unit off because it remains non-synergistic.

Instead, they should focus on strategic acquisitions to enhance their core marketplace business – such as Mercado Libre to gain access to the growth in Latin American. eBay already owns 20% of the company.

My other recommended acquisitions are in the vertical search space, which, if they sell Skype for a large chunk of money, and use that cash to finance, would have an overall strategic impact. A strong vertical search position can, in fact, give Google a run for their money.

eBay’s stock has not been doing much. Compared to Amazon, however, which is down 18% over the last six months, eBay is down only 2.5%. On the announcement of the results, eBay’s stock went up by 54 cents for the day. This morning, is is trading around $31. I’m not going to recommend the stock as a Buy until I get some clear signals from Donahoe that he is addressing the issues that I have raised above.

Update: John Donahoe has signaled, at least, that he will sell Skype.