eBay Inc (EBAY): Should You Invest in This Company Ahead of Results?

It is quite certain that a lot of individuals who have aspired to run an independent business must have executed their first sale on eBay Inc (NASDAQ:EBAY). It is like a mini platform for entrepreneurs to test their selling skill, which is indispensable for doing any business. The company’s business model is so canny and unique that it has carved out a separate space for itself in the world of retail. Being just a platform for connecting buyers and sellers, eBay is spared huge inventory cost, cost of building infrastructure and staffing expense.

Strong and Unique business model

The company has a rock solid business model, and with the earnings release right around the corner, let’s analyze if it is a good investment. As I mentioned, eBay Inc (NASDAQ:EBAY)’s business model allows it to operate on comparatively lower costs than traditional brick and mortar retailers and e-retailers. For the first quarter of 2013, the company increased its GAAP operating margin to 21.3% from 19.9% in the year ago quarter. The sluggish recovery in global economy has affected consumer spending in huge markets like Europe, resulting in loss of revenues for big retailers like Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT). A low-cost model powered by flawless customer service has delivered for eBay, whose share price has risen approximately 32% in the last 12 months.

PayPal is defining growth

The company’s next big strength is PayPal, which is growing continuously, ahead of a few other players who provide similar payments platform. In the year 2012, PayPal’s active account growth increased to 15% and finished the year with 123 million registered accounts. As many industry experts and analysts have claimed, mobile is the next big revolution, which will affect a number of sectors, including retail. eBay has already realized the significance of mobile and executed on its strategies effectively. A few months back, the company restructured its mobile group and released a number of updates to its apps.

Significance of Mobile

As per data, eBay Inc (NASDAQ:EBAY)’s mobile apps attracted 4 million new customers in 2012. The company has designed its apps in a way so as to complement a user’s shopping experience with the motive of promoting mobile as a mainstream source of revenue. Even PayPal mobile has delivered a commendable performance by handling $14 billion in payment volume. This news report in 2012 celebrates 100 million eBay app downloads along with other achievements in M-commerce. An expected surge in e-commerce sales presents a very lucrative opportunity for eBay’s revenue growth from Marketplace and PayPal.

Versus Amazon (NASDAQ:AMZN)

If one of the titans in the e-commerce business is eBay Inc (NASDAQ:EBAY), then the other is definitely Amazon.com, Inc. (NASDAQ:AMZN), a brand that has taken away a major chunk of business from traditional retailers. Over the last decade, it has branched out into different segments like music, games, e-readers etc. The company’s stock has gained over 30% in the last 12 months on the back of strengthening business momentum, dedicated customer service and newer flourishing segments. Amazon has often been criticized as an overvalued stock and quite frankly, it enjoys reasonable premium. Consider this, Amazon’s current PBV ratio is around 15.3 whereas eBay’s PBV ratio is around 3.88.

Amazon is quite a perplexing company because it is a pretty high valued stock with not so strong financials yet the market has not given it any big correction. While, some of the technical parameters seem to be out of line for this giant, its robust business model and principles have compensated well.

This traditional retailer is an exception

Brick and mortar retailers have been facing a hard time of late because of stiff competition from e-retailers and a weak economy. However, Costco Wholesale Corporation (NASDAQ:COST) has not succumbed to the wrath of time and generated robust results in the year. Its unique membership model and superb customer service has paid off handsomely. In spite of fee increases, its membership renewal rates touched around 89% in the U.S., implying healthy customer loyalty. Costco has also laid down plans for opening of stores in big markets like China and Brazil. The single best thing about Costco is that it invests reasonable resources in ensuring an educated and happy workforce, which helps it maintain high customer satisfaction.

Organic & inorganic growth

The company has gained growth momentum both organically and inorganically. In order to combat stiff competition from major players, eBay Inc (NASDAQ:EBAY) is expanding internationally by acquiring sites/entities that align with its strategies and also by investing great efforts in boosting the growth of marketplace and PayPal. Recently, it acquired 2dehands.be and 2ememain.be, two biggest online classified sites in Belgium. Though not a massive acquisition, it speaks highly of eBay’s plans on global growth.

Final words

In order to promote marketplace’s growth, the company has zeroed in on innovation and mobile adoption as its core strategies. eBay has been rebuked of not being a highly innovative company, which has pushed it into realizing the importance of innovation. For instance, it recently launched “Cassini,” a new search engine on marketplace that has a good number of features aimed at finding products on the website easily.

The three key terms that are glued to the future of eBay Inc (NASDAQ:EBAY)’s business are Marketplace, PayPal and mobile. The company is well placed now to leverage from the recovering economy and the increasing online presence of customers. Hence, it is a good time to invest in the stock.

The article Should You Invest in This Company Ahead of Results? originally appeared on Fool.com and is written by Mihir Mehta.

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