The Secret Weapon Behind eBay's Comeback
Don't look now, but investors have been quietly bidding up the price of eBay (EBAY).
Back in 2004, the online auction site was a cultural phenomenon and a profit machine. eBay's stock price rose above $59 a share that December, before some ill-conceived decisions, among them its expensive purchase of video chat/Internet phone service Skype, sent the company tumbling.
Since last summer, however, eBay has staged a gradual comeback, rising 68% from a low point around $19 in early July to $32.29 as of Tuesday's close.
Those gains are even more striking when compared to the performance of its peers. Since going public in 2007, MercadoLibre (MELI) -- often called the eBay of Latin America -- has seen its stock price more than double. That's not surprising, since MercadoLibre is a small, fast-growing company, while eBay began to drift around then. But their roles have reversed in recent months.
Over the last six months, eBay is up 40% and MercadoLibre is up 1%. And so far in 2011, eBay is blowing away even mighty Amazon (AMZN), rising 16%, while Amazon is down 6%.
Less Than a Third of eBay Sales Are Auctions
What's behind this slow but steady rally? For one thing, eBay seems finally to be reaping the fruits of its long and painful transformation from an auction website to a retail and e-payments company that thrives on mobile platforms and local commerce.
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The metamorphosis angered many longtime sellers, driving them to take their business to rival sites such as Amazon. And a series of redesigns aimed at weaning eBay's business model off auctions, which had a limited and fading appeal, ended up confusing many consumers, making the site an afterthought for many online shoppers. Auctions now account for less than a third of the goods sold on eBay.
eBay is still a far cry from the e-commerce trendsetter it was nearly a decade ago. Its marketplace business rose 8% in 2010 following a 5% decline in 2009. But globally, online retailing grew more than 10%. However, by improving the site's search, pushing mobile sales and cracking down on sellers with low ratings from shoppers, eBay is slowly wooing those lost customers back.
In fact, the website that most people think of when they think of eBay will play a smaller and smaller role in the company's future growth. During its recent analysts' day, eBay Chief Financial Officer Bob Swan said he expects eBay revenue to grow as much as 18% a year to $15 billion in 2013, while profits will grow as much as 14% a year.
But Swan also said the "original" eBay site will see much slower growth -- only around 6% a year. Other e-commerce properties that the company bought or built -- such as eBay Classifieds and Stubhub -- will see growth rates of around 14%.
The Power of PayPal
But the biggest reason for eBay's recent gains is PayPal. Revenue from the online-payment service rose 23% last year to $3.4 billion. eBay bought PayPal in 2002 for $1.5 billion, hoping to give buyers an easy, acceptable alternative to using their credit cards at its auction site. Now, that payments business is the parent company's growth engine. Swan expects PayPal revenue will keep growing by around 23% a year through 2013, while its share of the global online payments market approaches 24%, up from 18% last year.
Much of PayPal's growth potential lies in the mobile arena. PayPal payment technology has been embedded so far by 60,000 developers in 1,500 mobile apps.
PayPal now provides 38% of eBay's total revenue, up from only 28% just two years ago. Analysts expect PayPal to become the company's biggest source of revenue in a few years. Once that happens, one wonders: How long before eBay changes its name to PayPal?
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