This E-Commerce Giant's Success Isn't Due to Its Core Activity

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It's almost as if Coca-Cola started to make the bulk of its profits from bottled water, or Amazon.com by the sales of garden tools. Longtime e-commerce powerhouse eBay (NAS: EBAY) posted excellent second-quarter results that topped analyst estimates. But this wasn't due to jumps in revenue from the conducting of auction transactions, its signature business.

A best pal
eBay's net profit blasted ahead by nearly 150%, rising to $692 million from $283 million in the same quarter the previous year. Granted, that was due to a lower basis following the company's large-scale buy of e-store solutions provider GSI Commerce, but it was nevertheless a big improvement. At $0.56 per share, it also exceeded both the company's own projections and analyst expectations.

More tellingly, revenue zoomed ahead by 23% in the same time frame to $3.4 billion. This is because the company saw gains in all major segments of its business. Net revenue from its marketplaces (i.e., auctions and sales) division were $1.8 billion, or a 9% gain year on year. That's a pleasant number, but nowhere near the 26% enjoyed by the company's star performer, PayPal, which brought in $1.4 billion.


PayPal is where the real growth story is, now and in the future. Unlike the bread and butter of the auctioneering business, e-payment has enormous growth potential. Smartly, eBay is starting to exploit that potential by inking deals with bricks-and-mortar retailers to handle PayPal sales. It's entirely possible that in addition to credit cards, PayPal will be a common payment option at the supermarket and the shopping mall in the near future.

This is an exciting development, because that market is big. Look at a credit card behemoth like American Express (NYS: AXP) , for example. The company vacuumed in $32 billion in fiscal 2011 and netted a profit of nearly $5 billion. Not impressed with that 15% net margin? How about MasterCard's (NYS: MA) 28% in the same year, or, even better, Visa's (NYS: V) nearly 40%?

eBay's also making an admirable effort to push into other corners of this market. PayPal now offers Here, a smartphone card reader and accompanying app that allows mom-and-pop stores to handle credit card payments. This obviates the need for more sophisticated point-of-sale payment systems or relationships with the big credit card issuers.

Efficient and profitable
True to its tech roots, eBay is assertive in harnessing gadgetry in the pursuit of sales. The company just revealed that it has bought a small start-up, Card.io, that has a neat and potentially very complimentary line of business for PayPal -- it is developing technology to capture payment card data by using smartphone cameras. Card.io's team will be folded into PayPal's global product team in Silicon Valley.

This isn't the first opportunistic buy for PayPal. Last year it acquired Zong, a mobile-payments provider that allows anyone with a cell phone to make purchases through his or her carrier. These are subsequently itemized on the user's phone bill. This is another cool niche in the m-payments ecosystem that could potentially help drive further revenue growth.

All in all, looking at eBay's results and the pattern of its acquisitions and divestments, the company seems very clear and focused about its way forward. In 2009, it sold most of its resource-draining online telephony subsidiary Skype, and then it divested the remainder as part of a very pricey $8.5 billion sale to Microsoft (NAS: MSFT) , which now fully owns the entity.

Skype is a justifiably popular service, but not a lucrative one. As of the end of 2009, less than 7% of its active user base of 105 million people consisted of paying customers. The rest of its clientele presumably either used it for its venerated free Skype-to-Skype calling service or barely touched it at all.

Which is probably the big reason why, in the years 2005 to 2010, the company netted a profit exactly once -- in 2008, when it had a bottom line of $33 million on revenues of more than $550 million.

Microsoft doesn't break out the numbers for Skype, but judging by the information released, the service is probably continuing to lose money. It's been folded into Microsoft's Entertainment and Devices division, which also includes the venerable Xbox line of gaming consoles and accessories. In spite of the popularity of Skype and Xbox, the division's revenue has dropped to $1.6 billion in its most recent quarter, in contrast to the $1.9 billion it reaped in the same quarter the previous year. And it's loss-making, to the tune of $229 million in its latest three-month period.

A high flyer
It's not unusual for once-highflying tech companies to lose their way, falling to Earth and becoming Just Another Boring Company (Exhibit A: Microsoft). Happily, eBay seems to be quite the opposite -- a lean company still hungry for and focused on growing its business, despite its size and its past success. Its most recent quarterly numbers were impressive; if it continues to make the right moves, look for it to repeat that performance in future periods.

eBay makes a lot of its money abroad. There are a few companies that trump it in this department, however. We have the scoop on a trio of them in our free report "3 American Companies Set to Dominate the World," which is a mere click away.

The article This E-Commerce Giant's Success Isn't Due to Its Core Activity originally appeared on Fool.com.

Fool contributorEric Volkmanowns no stocks mentioned in the story above. The Motley Fool owns shares of MasterCard, Coca-Cola, Amazon.com, and Microsoft and has created a bear call spread position in American Express.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, Coca-Cola, eBay, Visa, and Microsoft, creating a write covered strangle position in American Express, and creating a bull call spread position in Microsoft. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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