eBay ( EBAY ) outperformed our expectations during the second quarter of 2015, with revenue from continuing operations showing 12% currency-neutral growth. As we expected, the company's earnings were powered by high growth in the PayPal business, where revenue rose by 19% (in FX-neutral terms) during the quarter. Although the marketplaces segment showed some signs of recovery, its top-line grew by only 5% (in currency neutral terms). The reported sale of eBay enterprise and the separation of PayPal will enable a more nimble and focused management structure to fast-track growth and innovation within both the payments and e-commerce businesses, in our view. We expect PayPal to continue to show robust growth in the coming years due to the immense market opportunity and due to PayPal's market leadership and innovations in this segment. On the other hand, we believe the resulting eBay could under-perform the broader e-commerce market, as it will have to navigate through several challenges to improve its outlook.
PayPal Drove Q2 Earnings; Its Future Outlook Also Looks Promising
PayPal reported strong growth during the second quarter, as its FX-neutral year-over-year top-line growth rose from 17% in Q1 to 19% in Q2. In dollar terms, the revenue grew by 16%. This performance was fueled by increased account coverage - while the global active accounts rose by 11% in Q2, the net number of payments and merchant-services total payment volume (TPV) rose by 27% and 36% (FX-neutral) respectively. And though the transaction margin fell during the quarter, owing to reduction in take rates (with larger merchants), the segment margin rose by 160 basis points annually to 26.1%, due to efficiency improvements.
We expect the long-term outlook to be strong for PayPal, as we think its various investments in Braintree, Venmo and Xoom (which was acquired recently) could pay-off highly in the coming future. Additionally, PayPal's new innovations such as One Touch payments, Paydiant technology, etc., could boost the company's popularity with merchants. However, in the short-term, we forecast margin-related headwinds in the PayPal business, due to factors including dis-synergy costs, heavy investments, and the recent sale of U.S. held credit receivables portfolio.
Though eBay Showed Signs Of Stabilization, It Still Has A Long Way To Go Before Growth Could Normalize To Levels On Par With The Broader E-Commerce Market
The marketplaces segment showed improvement in performance, as the annual revenue and GMV growth (both in FX-neutral year-over-year terms) rose from 3% and 5% respectively in Q1 2015, to 5% and 6% respectively in Q2 2015. However, currency headwinds had a significant impact as the top-line fell by 3% in dollar terms. Traffic-related challenges owing to last year's security and Google Panda update continued to impact this segment - this is as the annual global active buyer growth slipped to 6% in Q2 2015, as compared to 8% and 10% in Q1 2015 and Q4 2014, respectively. In addition, the marketplaces segment margin fell by 50 basis points annually, due to adverse currency movements and increased investments.
eBay's management is taking a slew of measures to re-invigorate growth within this segment, such as structuring product listings into catalogs, focusing on key customer segments and deal categories, improving consumer experience across multiple products, and diversifying traffic sources to include social platforms (such as Facebook, Pinterest, Instagram, Snapchat). However, we think these efforts could take a long time to show results, and hence we expect eBay to lose market share in the global e-commerce market in the near-future. In another update, eBay is expected to divest its Enterprise business in a deal valued at $925 million. Moreover, the company has also recently exited its stake in Craigslist. We expect such divestitures to be positive for the company in the long-run, as it will help the management in refining their focus on fewer business categories. With the competition rapidly intensifying in the global e-commerce market, we believe eBay will have to quickly ramp up its play to sustain and grow its share in the market.
We are in the process of revising our $59.12 price estimate for eBay's stock.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap