It’s amazing to me that a company like eBay Inc (NASDAQ:EBAY) can continue to post impressive growth. This company along with Amazon.com, Inc. (NASDAQ:AMZN) was one of the first to establish its presence online, and its dominance in the auction space has really never been questioned. When it seemed like eBay was slowing down, the company made an even bigger push with its PayPal unit, which has led to even more impressive growth. Everything seems to be moving in the right direction, but there are two concerns that could change the course of this company.
Retail everywhere
One thing that is certain is, every retailer has to be able to do business anywhere at any time. Successful businesses like Amazon.com, Google Inc (NASDAQ:GOOG), and Wal-Mart Stores, Inc. (NYSE:WMT) are all where they are because they can do business in multiple ways.
Amazon.com, Inc. (NASDAQ:AMZN) offers customers the ability to buy on their computer, tablet, or smartphone. The business is open 24 hours a day 7 days a week, and ships worldwide. Google is trying to push into commerce through Google Inc (NASDAQ:GOOG) Offers, offering to ship items through local retailers, and with items like the Nexus and Chromebook in retail stores. Wal-Mart Stores, Inc. (NYSE:WMT) has thousands of locations, many are open either 24 hours or have extended hours. Walmart.com also offers thousands of products and ships worldwide.
What makes this company different?
So if customers are as likely to shop with Amazon.com, Inc. (NASDAQ:AMZN), eBay, Google Inc (NASDAQ:GOOG), or Wal-Mart Stores, Inc. (NYSE:WMT), what makes eBay different? eBay has several strengths that can’t be matched by any of their competitors. First, eBay makes money essentially helping other people sell their stuff. While Google takes part in this through Google Offers, Amazon and Walmart are more traditional retailers. eBay also uses its PayPal unit not only to assist transactions on eBay Inc (NASDAQ:EBAY), but PayPal is now accepted in over 20,000 retail stores.
The second difference is, eBay works perfectly on mobile devices. eBay offers their apps on all major mobile operating systems. The company allows customers to compare prices in stores through their apps. eBay doesn’t have to beat its competition on price, it can allow its sellers to do that.
Third, eBay Inc (NASDAQ:EBAY)’s core growth rate is second only to Amazon.com, Inc. (NASDAQ:AMZN). When comparing companies, I use a measure called core operating cash flow. Core operating cash flow is simply a company’s net income plus depreciation. Using this measure eliminates some of the non-cash adjustments companies make to their cash flow.
Using this measure, only Amazon showed a faster core operating cash flow growth rate of 23.69% over the last year. eBay came in second showing 21.02% growth, compared to 18.22% growth at Google Inc (NASDAQ:GOOG), and 7.01% growth at Wal-Mart Stores, Inc. (NYSE:WMT). Given the fact that investors can buy eBay for a P/E ratio 89% cheaper than Amazon.com, Inc. (NASDAQ:AMZN), and get almost the same cash flow growth is impressive.
These two problems threaten both of eBay’s businesses
The first problem I’ve noticed is with eBay Inc (NASDAQ:EBAY)’s PayPal unit. PayPal is posting impressive growth in accounts, but the number of payments is going the other direction. In fact, in the last five quarters, active account growth has increased from 12% to 16%. In this same timeframe, net payments have decreased almost sequentially from 31% to 23%. With more members and less net payments, PayPal’s growth seems to be slowing down.
The second big issue affects the company’s Marketplaces business. With Congress talking about allowing states to determine who must collect sales taxes, if this change occurs, larger eBay sellers are likely to see a decline in sales. One of the reasons customers shop online today is to avoid sales taxes. While better prices sometimes are available online, that isn’t always the case. In fact, more often than not, pricing is very similar until you get to the sales tax issue. If states are allowed to define sales tax collection on a broad scale, both eBay and Amazon’s sales will suffer.
So what do you do?
Investors need to understand the risk created by a potential sales tax on Internet purchases, and the slowdown in eBay’s PayPal division. The good news is eBay sells for no where near the P/E ratio of Amazon.com, Inc. (NASDAQ:AMZN), but the company’s growth rate is also much lower.
Google Inc (NASDAQ:GOOG) and Walmart strangely enough could benefit from a sales tax on Internet purchases. Google’s main business is advertising, and if traditional retailers benefit from a more level paying field, they would theoretically have more money for advertising. Walmart is already competing effectively with online retailers, and a level playing field would only drive more traffic into the stores.
The good news for eBay Inc (NASDAQ:EBAY) investors is, even with these challenges, many smaller sellers wouldn’t be affected by sales taxes. In addition, at under 19 times projected earnings, eBay is still in line with their competition. Investors were treated to a very good earnings report this quarter. In the future, how things play out with sales taxes and the growth of PayPal will likely determine the company’s fate.
The article Huge Growth Could Be Derailed by Two Big Worries originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
