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It’s Time To Stop Worrying About This E-Commerce Giant

Saturday - 7/20/2013, 2:38pm  ET

E-commerce giant eBay has long lived in the shadow of Amazon . With half the market value and none of Amazon’s cool gadgets, digital distribution platforms, or cloud-based storage, eBay has relied heavily on its popular digital payments platform, PayPal, to remain competitive.

Yet a direct comparison of eBay against Amazon wouldn’t be fair, considering that the former is an auction and consumer-to-consumer site whereas the latter is an e-commerce superstore. Investors, however, still tend to be much more forgiving when Amazon misses top or bottom-line estimates.

Earnings come up short

When eBay reported its second quarter earnings on July 18, shares plunged nearly 7%.

The company reported non-GAAP adjusted earnings of $0.63 per share, or $822 million, up 12.5% from $0.56 per share in the prior year quarter. Revenue rose 14% year-on-year to $3.9 billion. However, eBay’s earnings missed the consensus estimate by a penny, although its revenue topped the estimate of $3.89 billion. eBay’s top and bottom-line growth were actually quite stable compared to Amazon’s 36.9% decline in earnings and 21.9% growth in revenue last quarter.

Unfortunately, eBay spooked investors with its lackluster third quarter guidance, which called for earnings of $0.61 to $0.63 per share and revenue between $3.85 billion to $3.95 billion. Analysts had expected eBay to earn $0.65 per share on revenue of $3.97 billion.

Positive growth catalysts

During the second quarter, eBay’s most noteworthy growth was in three areas - PayPal, international sales, and mobile. PayPal’s user base grew 17% to 132 million and its total payment volume rose 24% to $43 billion. PayPal’s total revenue rose 20% to $1.6 billion, accounting for 41% of eBay’s top line. PayPal also expanded into six countries and signed agreements with over 50 merchant acquirers to use PayPal over Discover Financial’s payment network.

Meanwhile, eBay’s cross-border (international) trade came in at $11 billion, accounting for 22% of eBay’s total Enabled Commerce Volume (ECV). Lastly, eBay added three million new mobile customers during the quarter, growing its user base 90% year-on-year, representing positive growth potential in the critical segment of shoppers more frequently using smartphones and tablets to shop.

Despite that solid growth, it’s clear that investors were spooked by its earnings miss and weak guidance. Therefore, I think it’s interesting to see how eBay’s growth compares to some of its overseas equivalents.

MercadoLibre’s murky forex problems

One of eBay’s biggest overseas investments is its 19.5% stake in MercadoLibre , commonly referred to as the “eBay of Latin America.” Last quarter, MercadoLibre reported an 11% decline in earnings on a 22.7% gain in revenue. MercadoLibre also has more robust margins than eBay and Amazon, as seen in the following chart.

However, MercadoLibre’s biggest challenge is balancing out its business growth across 13 Latin American countries, many of which have been hit by inflation that have distorted revenue growth. In particular, revenue from Venezuela and Argentina, which are experiencing hyperinflation yet report revenue at official exchange results, can be misleading.

For example, Venezuela, which accounted for 15% of MercadoLibre’s top line last year, has enacted currency controls that prevent businesses from obtaining U.S. dollars, and commercial forex transactions value the bolivar at 75% less than the official exchange rate. A similar problem is also emerging in Argentina, which accounts for 25% of the company’s revenue.

This has led some analysts, such as Off Wall Street Consulting Group’s Mark Roberts, to speculate that MercadoLibre’s 2012 earnings should have been 20% lower if it reported revenue “at market” rather than the distorted official forex rates. Yet other analysts believe that the fear is overblown. JPMorgan analyst Andre Baggio stated that the devaluation of the Venezuelan bolivar and the Argentine peso would only impact its top-line growth by 8%.

Despite these concerns, MercadoLibre’s stock has risen more than 40% over the past twelve months, trading at a feverish 47 times trailing earnings. It’s clear that investors still expect big things from this sprawling e-commerce giant that dominates some of the fastest growing economies in the world.

The rising dragon of the East

E-commerce is one of the hottest businesses in China, yet it is one that Amazon and eBay have failed to scratch. eBay attempted to break into the market in 2003 by acquiring EachNet.com, the country’s dominant consumer-to-consumer website, and managed to reduce its 90% market share to 10% before it sold it. Amazon entered China by acquiring online bookstore Joyo.com in 2004, but hasn’t had much more success than eBay - recent reports state that Amazon’s Chinese market share is at less than 1%.

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