eBay Earnings: What to Expect From Its 2-Pronged Growth Attack

eBay will release its quarterly report on Wednesday, and investors haven't been happy with the roller-coaster ride that the stock has taken them on over the past year, especially since it hasn't led to any lasting results. Yet as much as longtime shareholders have focused on the growth potential of PayPal and its challenge to mobile-payment players that range from traditional credit card networks to Square, Groupon , and other payment upstarts, eBay's auction and marketplace website has reemerged as a key component of growth for the online giant and could continue to play an even larger role in the company's overall future in challenging Amazon.com's online-retail dominance.

eBay has come a long way since its beginnings as an online-auction website. Although auctions still play a vital component in its business, many of eBay's users count on Buy-It-Now listings that allow immediate purchases rather than participating in auctions. Moreover, PayPal has gone well beyond its initial role in facilitating eBay-centered transactions, with many users having little or no connection to eBay's online-retail offerings. As Amazon has moved to embrace outside third-party sellers, it has come more directly into conflict with eBay's business model. Let's take an early look at what's been happening with eBay over the past quarter and what we're likely to see in its report.

Source: Steven Arnold, Wikimedia Commons.

Stats on eBay

Source: Yahoo! Finance.

Can eBay earnings keep climbing?
In recent months, analysts have gotten a lot little optimistic about eBay earnings, cutting fourth-quarter estimates by a penny per share and full-year 2014 projections by double that amount. The stock also hasn't gone anywhere, falling 1% since mid-October.

eBay's third-quarter earnings didn't give the online company the start it would have liked to see to the quarter. Revenue grew 14%, boosting net income by 17% and helping to produce a modest beat on the bottom line. Mobile commerce as a big growth engine, rising 75%, and PayPal's revenue growth of 19% came from a 25% jump in payment volume and a 5-million user jump to 137 million active users. But a cautious forecast for the holiday season, with revenue guidance that was below what investors had expected to see, send shares falling sharply after the report.

One concern about eBay's strength comes from the fear that competition from Square, Groupon, and other companies is threatening PayPal's margins. During the third quarter, PayPal's take rate fell by nearly a quarter percentage point to 3.7%. Yet the company points to the lower rates it offers high-volume users as a major cause for the decline, and if that points to greater use of the service, it represents a win for eBay.

Moreover, even though eBay has seen fairly impressive growth from its marketplace segment, Amazon and Latin America's MercadoLibre have seen much more faster growth figures. The move that eBay has made away from auctions toward fixed-price sales is encouraging, as more than 70% of eBay sales come from fixed-price offerings that facilitate faster turns for eBay's seller-partners. Yet Amazon's ability to provide its Prime service and its fairly uniform customer experience stands in contrast to eBay's more hands-off approach, forcing users to deal directly with sellers while using eBay's dispute resolution services as a last resort in cases of disagreements.

But eBay is striving to make itself a bigger force in both industries. Its acquisition of global online- and mobile-payment platform Braintree should help PayPal become a better player in the mobile-payment space. Meanwhile, eBay's Shopping.com website hopes to challenge Amazon with comparison-shopping services, and with the eBay Now service expected to offer same-day delivery, eBay wants to get in on the perceived advantage of Amazon Prime. Mobile applications could also help eBay become a bigger force in the rising mobile-commerce area.

In the eBay earnings report, watch to see where the company's growth comes from and whether the stock can break out of its long funk. With more-balanced growth from both of its divisions, eBay could finally move higher and reward shareholders for their patience.

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