On its earnings conference call late Wednesday, eBay (Nasdaq:EBAY) CEO John Donahoe said that “consumers have shopping malls in their pockets.” And it’s true that Apple’s (Nasdaq:AAPL) iPhone and Google’s (Nasdaq:GOOG) Android devices are transforming e-commerce.
While this has been a nice boost for eBay, it hasn’t been enough to impress investors — at least based on the company’s quarterly profit report. Its fourth-quarter guidance was disappointing, and shares of eBay were off by 6% to $31.17 in Thursday trading.
Yet is this mostly an overreaction? Let’s take a look at the pros and cons:
Pros
Payment powerhouse. eBay’s PayPal continues to grow at a rapid clip. The user base increased by 14% to 103 million over the past year and revenue climbed 32%.
eBay seems to have no problems finding new avenues to boost growth. For example, one big opportunity is the gaming space, where PayPal has struck a deal with Microsoft (Nasdaq:MSFT) to allow Xbox 360 users to buy virtual goods.
Mobile. A key to the e-commerce strategy is mobile. For this year, eBay forecasts sales volume to exceed $3.5 billion. There have been more than 50 million app downloads, and consumers are making three purchases every second.
Interestingly enough, eBay plans to launch an image-recognition technology its iPhone and Android apps. That means you’ll be able to take a picture of someone’s shirt and then allow you to buy the same item on eBay. This is something that could be a break-out product.
Focus. Just a few years ago, eBay faced big challenges. Its auction business was lagging and the acquisitions strategy was in shambles. But the company has been able to turn things around. A key part has been unloading non-core operations, such as Skype. But there has also been more aggressive investments in growth areas like payments and mobile.
Cons
Competition. While there are many rivals, Amazon.com (Nasdaq:AMZN) is probably the biggest threat. The company continues to push forward with innovations, such as its latest Kindle Fire, which could become a key platform for e-commerce and even be a worthy rival to the iPad.
But eBay must also worry about new forms of e-commerce, such as the daily-deals market. So far, it is Groupon that is the dominant player in the space, but there are now traditional players coming in, such as Amazon and Google.
Distribution. While growth in mobile is likely to be strong for some time, it could be a problem for eBay. The fact is that Google and Apple control their platforms, which means they will have lots of influence on e-commerce. No doubt, these companies are building their own mobile payments systems, which could shut off PayPal.
At the same time, it may be tough to make inroads in social applications. Facebook, for example, has it has its own payments technology called Credits.
Macro economy. eBay’s soft estimate for the Christmas quarter is certainly concerning. No doubt, this is a critical period of the year for the company.
And might the weakness spillover into 2012? Besides the U.S. and Europe, there are also signs that Asia is slowing down.
Verdict
eBay has a strong offering of services — in terms of payments, ecommerce, auctions and mobile applications. More importantly, the company remains committed to innovation, as seen with its image-recognition technology. eBay also has plans to implement its systems into televisions. This nascent market is known as “t-commerce.”
There will likely be short-term headwinds because of the competition and slow economy. Yet eBay should be a big winner from the relentless shift towards e-commerce and mobile. As a result, the pros outweigh the cons on the stock.
Tom Taulli runs the InvestorPlace blog “IPO Playbook,” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter @ttaulli. As of this writing, he did not own a positioning any of the stocks named here.
