eBay Inc (NASDAQ:EBAY)’s recent quarter was fairly strong, but the weak guidance is what caused the sell-off in the stock. The company trades at an expensive P/E multiple, and as such, it has to offer substantial growth otherwise investors will sell the stock on any signs of deterioration in growth/outlook.
Macroeconomic indicators
eBay Inc (NASDAQ:EBAY)’s total payment volumes surged year-over-year. The effects are numerous. For one, it implies that online retail is booming (look out for Amazon.com, Inc. (NASDAQ:AMZN)), online retailers, along with specialty retailers can be seen as better buying opportunities going forward.
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eBay
eBay Inc (NASDAQ:EBAY)’s total payment volumes grew 25% in the merchant category. The increasing adoption of digital payment systems implies that online retailers, along with specialty retailers, should be able to report better results. The growth in digital currency greases the wheels of commerce, and it can be seen as an accurate forward indicator.
Furthermore, eBay Inc (NASDAQ:EBAY)’s international payment volume jumped 47% year-over-year, which has counter-balanced the declining growth from maturing markets (United States and Europe).
Source: Ycharts
U.S. real personal consumption expenditures have been on a consistent incline over the past five years. The growth in personal consumption, along with simplified methods to purchase goods and services (PayPal, Visa, MasterCard), should grease the wheels of retail companies.
How this applies to other companies
Online giant Amazon.com, Inc. (NASDAQ:AMZN) relies heavily upon online commerce. Amazon.com, Inc. (NASDAQ:AMZN) is rolling out its online retail platform to emerging and developing markets. PayPal reported 47% year-over-year growth in its international payment volumes. The emerging market is one of Amazon.com, Inc. (NASDAQ:AMZN)’s biggest bets, and it’s banking on the adoption of digital currency in order to meet its growth targets.
Analysts anticipate Amazon.com, Inc. (NASDAQ:AMZN)’s to grow earnings by 37.69% on a compounded basis for the next five years.
Wal-Mart Stores, Inc. (NYSE:WMT) is another beneficiary of this news. Retailers love it when merchant services like Visa Inc (NYSE:V), PayPal, and MasterCard Inc (NYSE:MA) post growth in payment volumes.
Improvement in payment volumes leads to more accurate record keeping of financial transactions. Wal-Mart Stores, Inc. (NYSE:WMT)’s international division may be able to report improved profit margins due to efficiencies in basic commerce. The international adoption of digital currency gives investors a reason to stay invested in retail.
Wal-Mart has 10,700 stores in 27 countries with earnings per share growing by 59% over the past five years and has successfully returned $60 billion in cash to shareholders as well. If Amazon.com, Inc. (NASDAQ:AMZN) is too risky, why not turn to Wal-Mart? After all, Wal-Mart’s business strategy is a proven success.
eBay Inc (NASDAQ:EBAY)’s earnings performance
Investors sold the stock after the company reported earnings that barely beat analyst estimates by a penny. eBay Inc (NASDAQ:EBAY) reported quarterly earnings of $0.63 per share, with analysts anticipating $0.62 per share. The slight beat on earnings sent some shivers down the spines of analysts as it alluded that eBay Inc (NASDAQ:EBAY)’s growth may be maturing and that the growth premium factored into the stock should be scaled down a little.
eBay’s guidance was the worrisome aspect of the earnings report. eBay expects revenue for the full-year to be $16 billion to $16.5 billion, with earnings expected to be $2.70 to $2.75 per share. Analysts were anticipating earnings of $2.74 per share. eBay’s performance is likely to be in the mid-range of its guidance forecast ($2.73), implying that eBay’s earnings will either miss expectations by a penny, or beat expectations by a penny. It honestly depends on how eBay recognized losses for the current fiscal year, and if growth deteriorates in foreign markets.
eBay generated 14% year-over-year revenue growth, and EPS grew 14%. eBay’s operating margin remained flat, which is why analysts were somewhat disappointed. eBay reported 14% growth in its eBay market place revenue; the GSI division was flat (eBay’s buy out of GSI commerce for $2.4 billion may have been a financial failure). eBay’s growth is primarily driven by its merchant services (PayPal), which generated 18% year-over-year revenue growth.
Conclusion
eBay’s recent earnings announcement fell short of its own guidance. This was driven by the flat performance from the GSI Commerce division of the company, along with the rallying dollar against a basket of currencies. eBay could have generated higher returns on invested capital by buying a sector ETF rather than acquiring this non-performing division. eBay’s core business portfolio (marketplace and merchant services) showed stable growth, with international markets being the primary growth catalyst.
eBay is still a growth stock, and I see no fundamental deterioration in the company’s performance. eBay will sustain its EPS growth with expansion into foreign markets and may generate even further improvement in profits due to cost-cutting. The company’s macroeconomic environment is improving. U.S. consumption is growing and consumer sentiment is recovering. This will lead to organic revenue growth in its marketplace and merchant services division.
The overall trend is up, and while analysts may be flustered, investors should stay the course.
The article This Company’s Long-Term Prospects Are Still Intact originally appeared on Fool.com and is written by Alexander Cho.
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