eBay Inc (NASDAQ:EBAY) CEO John Donahoe has some high goals for the online merchant and payment processing company. He wants to see the company enable $300 billion in online commerce through various platforms – Marketplace, PayPal, and GSI Commerce.
As a frame of reference, $300 billion in activity would mean 71% growth from 2012 numbers. Can it be done?
eBay Inc (NASDAQ:EBAY)‘s explosive growth
Investors shouldn’t be so quick to discount eBay Inc (NASDAQ:EBAY) as a kingpin of online retail. The company’s online auctions platform and PayPal growth offer explosive revenue and profit potential.
Here’s the numbers investors need to know when it comes to eBay:
1). Total company revenues: eBay Inc (NASDAQ:EBAY) expects to reach total company revenues of $21.5 billion, offering an upper range that peaks at $23.5 billion by 2015.
2). Free cash flow: eBay Inc (NASDAQ:EBAY) projects total free cash flow from the years 2013-2015 to come to $11 billion, aided by strong margins from PayPal, which has a firm competitive position in online payment processing.
3). PayPal revenue growth: the company expects PayPal to grow revenue at a 22% compounded annual rate to 2015, with estimates for 2015 revenue as high as $10.5 billion.
These numbers are incredible when one considers the company’s current valuation of $70 billion, which leaves the company to trade at 17.4 times 2013 earnings expectations.
Why PayPal is eBay’s hole card
PayPal’s competitive position, rapid growth, and incredible gross margins make it the strongest part of eBay’s three main service products: online auctions, order fulfillment via GSI commerce, and payment processing.
For the full year 2012, PayPal contributed $5.5 billion in net revenue to the company on payment volume of $144.93 billion. Outside of eBay’s own Marketplace system, PayPal processed more than $97 billion in total payment activity, up 25% from the 2011.
This is why PayPal is such a valuable asset to eBay. While the company generates robust revenue from processing payments on its auction site, the company also stands to profit from any and all expansion in online retail. eBay reported in its annual report that PayPal enjoyed a whopping 16% share of all online shopping checkout processing business.
PayPal gives eBay exposure to a broader trend of growth in all of online shopping. Online retail is putting up numbers consistent with PayPal’s projections. Shoppers bought 16% more during the 2012 holiday season than the year ago period–incredible growth for an industry more than two decades through its growth phase.
PayPal is growing much faster than eBay’s online marketplace. The company reported a 26% increase in year over year net revenue from payments, compared to 11% for the marketplaces segment. Continued growth of 22% annually would, by the company’s own projections, leave PayPal with $9.5 billion to $10.5 billion of net revenue by 2015. Assuming a constant margin of 20% after corporate overhead is accounted for, PayPal could generate as much as $2.1 billion in cash on a run-rate starting in 2015.
eBay vs. Amazon.com, Inc. (NASDAQ:AMZN): the best retail play
The two largest players in online retail have a lot in common, but when it comes to the financial reports, the two are very different.
Here’s why: eBay can grow without significant capital expenditures. Only 7% of the company’s free cash flow was spent on capex in 2012, even though the firm has double-digit annual revenue growth expectations for all of its units.
Amazon.com, Inc. (NASDAQ:AMZN), by contrast, spent more than 10 times more on capex than it generated in cash flow. The lesson is simple: eBay is a very different online play. It can grow without big asset investments, doesn’t trade for a ridiculous price to earnings ratio (17 times forward earnings compared to Amazon.com, Inc. (NASDAQ:AMZN)’s forward earnings multiple of 60), and can grow regardless of where people shop online, thanks to its ownership of GSI Commerce and PayPal’s payment processing business.
Amazon.com, Inc. (NASDAQ:AMZN) struggles in the most competitive part of online retail: grabbing a loyal customer who will stick with the company through thick and thin. While Amazon.com, Inc. (NASDAQ:AMZN)’s customers rate the retailer highly in consumer surveys, one has to believe its due to the tremendous discounting that the retailer employs to win over new customers. To see this one need only look at its net margin over the past 7 years, a period in which net margin peaked at 3.68%. eBay, however, routinely logs double-digit net margins, earning 18.5 cents on every dollar in revenue to the firm in 2012.
