eBay (EBAY) has been a volatile stock since I added it to my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on May 3. (For all of my annual changes to that portfolio see my post http://jubakpicks.com/2013/05/03/10-long-term-picks-in-a-short-term-market/ .) From $51.63 on April 22 to $54.21 on May 3 and $56.65 on May 15 down to $50.74 on June 20 and then back up to $57.38 on July 16.
The issue I think is timing.
The company is generating considerable momentum in its PayPal payments and its market place business but it’s not clear when that momentum will lead to accelerated revenue and earnings growth. In the second quarter eBay reported a 14% year over year increase in revenue plus a 10% increase in EBIT (earnings before interest and taxes.) But both those figures were disappointing to investors who were looking for faster growth given the increase in the company’s traffic fundamentals. Guidance that told Wall Street analysts to expect the lower range of the company’s revenue and earnings projections for the full year just added to the disappointment.
Looking at the underlying trends at eBay I can understand the disappointment and impatience. The company has added 19 million active users to its PayPal base in the last year and 15 million active users on for its market place.
You’d think, the reaction went, that these numbers would have added up to more.
I believe what eBay needs is patience from investors rather than an overhaul of its business model.
Payment revenue at PayPal rose 20% year over year in the quarter and there’s no reason to think that that growth rate isn’t sustainable over the next five years as more and more Internet commerce moves to mobile devices that require payment platforms such as PayPal. The issue for eBay and PayPal is the same one faced by Amazon.com (AMZN)—how much do you invest and how fast in driving growth in this Internet platform? Margins for PayPal at 23% in the quarter were lower than many analysts had expected because of investment in the platform.
The company has turned around its market place business, which had been acting as a drag on PayPal. Revenue in this eBay segment took a hit from a stronger dollar. On a reported basis revenue for the unit grew by 10.5% year over year. Correcting for foreign exchange growth would have been 13.1%. Foreign exchange effects—along with slower growth in Europe and Korea—accounted for the bulk of the company’s lower guidance for the full year.
The big question for eBay is when the scale that the company has built and is building turns into higher margins. It may take time—which is why this stock is in my long-term portfolio—but I think an increase from the 23% margin in the last quarter to 25% in 2014 is doable. Margin in the marketplace business climbed to 39.7% in the quarter from 39.6% in the second quarter of 2012. Slow progress but progress nonetheless.
I think the stock’s volatility is likely to continue until the company can demonstrate that scale is turning into higher margins on a consistent basis. I’d look for that in 2014.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of eBay as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.