Where Will eBay’s Growth Come From?

A recent Forrester report on US online retail sales projected online holiday sales to grow 15% over the year to $78 billion spurred by the availability of features like free shipping, deals and discounts. That may still be a conservative estimate when one compares National Retail Federation’s projections of online holiday sales to grow to $82 billion. In reality, on Black Friday, according to an IBM research, web sales grew 21% over the year as retailers like Amazon and eBay both “siphoned consumers from brick-and-mortar stores”. But surprisingly, eBay’s (Nasdaq: EBAY)  recent quarter’s bigger news was driven by their payment segment business, PayPal.

eBay’s Financials

eBay’s fourth quarter revenues grew 13% over the year to $4.53 billion, marginally short of the Street’s expectations of $4.55 billion. EPS of $0.81 was, however, ahead of the Street’s projections of $0.80.

By segment, Marketplaces revenues grew 12% to $2.3 billion with gross merchandise volume growing 13% to 21.52 billion. PayPal’s revenues grew 19% to $1.8 billion and revenues from the enterprise segment fell 2% to $0.39 billion.

Mobile was a big contributor of growth. During the year, 40% of new eBay users used mobile apps. Total mobile commerce volume grew 88% and they added over 14 million customers on mobile devices. They ended the year with revenues growing 14% to $16.05 billion with an EPS of $2.71.

eBay expects revenues for the current quarter to be $4.15 billion-$4.25 billion with EPS of $0.65-$0.67. The market was looking for revenues of $4.3 billion and EPS of $0.72 for the quarter. eBay projected 2014 revenues at $18.0 billion-$18.5 billion with EPS of $2.95-$3.00, again falling short of the market’s projected earnings of $3.12 per share. The Street was looking for revenues of $18.5 billion for the year.

For the year 2015, eBay projected revenues of $20.5 billion-$21.5 billion, with EPS growing over 10%. The Street was projecting revenues of $21.2 billion.

Will eBay Spin off PayPal?

More significantly, the market was abuzz with talks about activist investor Mr. Carl Icahn’s proposal to split eBay into two with Marketplace and PayPal becoming independent entities. Mr. Icahn owns 0.82% stake in eBay and made the non-binding proposal to help the company deliver faster growth.

eBay has refused the offer because of the fact that PayPal is the main driver of growth for eBay. Not only does PayPal see stronger revenue growth, but also continues to attract a bigger customer base. Recently, eBay strengthened PayPal’s offering by adding features such as Here, which is PayPal’s version of a mobile card reader. But PayPal’s growth is also dependent on Marketplace. During the last quarter, nearly a third of PayPal’s new accounts and half of their new mobile accounts came from Marketplace’s user base. Additionally, Marketplace helps fund growth for PayPal. eBay CEO John Donahoe, apparently, gave Icahn a ‘tutorial’ on how eBay’s business works, and why spinning off PayPal is a bad idea.

Meanwhile, eCommerce in China is booming, and Latin American eCommerce leader MercadoLibre continues to deliver strong growth. eBay’s international strategy needs revisiting. Why isn’t John Donahue making more decisive moves into those markets?

During last year, eBay’s international revenues grew 14% over the year, in line with the revenue growth in the U.S. The growth was benefited by the improved market conditions in Europe and their tie up with Argos in the U.K. Now, U.K. shoppers can collect their online purchases from a local Argos store in the U.K. Within the emerging markets, eBay’s biggest growth seems to be in India where they invested $50 million in local online retailer, Snapdeal. Within Latin America, they are driving growth through mobile initiatives and PayPal. PayPal has a domestic payment capability in Brazil for PayPal. Last year, they also launched a mobile app in Brazil that lets Brazilian consumers shop eBay’s global inventory.

eBay’s stock is trading at $54.94 with a market capitalization of $71.13 billion. It touched a 52-week high of $58.04 in April last year. As you see, the chart explains why Icahn and other shareholders are getting antsy about the growth rate of the company. The stock has been relatively flat for a year.