The U.S. ecommerce giant, eBay Inc.(EBAY, Financial), is expected to release its fourth-quarter earnings result on January 21 and while analysts are expecting the payments division PayPal to report robust growth, its marketplaces segment is likely to show slow growth in the fourth quarter or maybe there might have been no growth at all. While the company is known for its innovative business model and has continuously generated rich cash flow in the past quarters, analysts are trying to solve the jigsaw puzzle as to how the ecommerce behemoth is likely to perform in the fourth quarter of the fiscal year 2014. Let’s take a sneak peek into what is being shared from the analysts’ corner regarding the estimates on the fourth quarter earnings of eBay.
PayPal to exhibit brisk growth
In the nine months that ended September 2014, the payment segment’s revenue and total payments volume rose by 19% and 28% respectively though there was weakness felt in the marketplaces segment. Analysts are expecting that high demand in the segment would persist in the fourth and the upcoming quarters as the online payment market is showing phenomenal growth. As PayPal is a market leader in the online payment market, it would reap the benefits in such an existing environment.
Also product innovations such as One Touch payments and high growth within the recently acquired subsidiary Braintree, which happens to be a leader in the mobile payments space would drive the revenue of eBay during the quarter. In fact, in the third quarter, PayPal’s mobile payments volume surged almost 72%, contributing nearly 20% to the total payment volume of that quarter.
As eBay and PayPal would become separate entities by the end of this year, analysts are opining that PayPal as an individual entity would be able to navigate the rapidly changing competitive environment with more flexibility. However, for the fourth quarter revenues from PayPal are expected to grow over 20% year-over-year to around $2.2 billion.
Marketplaces segment will serve as the main drag
Marketplaces represent the core business line of the company where the auction and merchant listings take place. This segment has been facing tough times with Google’s (GOOG, Financial) policies getting toughened on security breaches and with the recent changes that were made to the Google SEO algorithm. Due to such continued headwinds, the SEO traffic to the company’s auction business has been affected which in turn would impact the division’s growth in the fourth quarter.
The SEO challenge has reduced traffic and the growth has gradually declined – from 11% in first quarter to 9% in second quarter to 6% in third quarter of fiscal year 2014. Nevertheless, this trend is expected to continue going forward into the fourth quarter as well. To add more problems to this business line, was the security breach which hit eBay’s marketplace earlier this year and compelled management to implement security protocols and request users to change their passwords. This in turn proved detrimental to the business as users started showing a gradual slowdown in buying activity, since many of them did not change their passwords and exercised caution.
Such challenges are all expected to mitigate the improvement in profitability in the fourth quarter as well for eBay. As per the same-store sales data compiled by ChannelAdvisor, eBay’s sales has underperformed in the ecommerce market in the past three months. Same store sales came in 4.4%, 9.8% and 5.8% during October, November and December, respectively. This was highly threatening given the huge sales posted by chief rival Amazon (AMZN, Financial) which reported same store sales of 32.4%, 35.7% and 21.8% during the same respective months.
In fact, investors are worried about how eBay expects to accelerate the growth in its marketplaces segment which recorded less than 7.3% growth during the holiday season, when the baseline year-over-year growth for the overall U.S. ecommerce sales was pegged at 16% by ChannelAdvisor.
The company earnings guidance stands between $0.73-$0.76 a share, which is well below the analysts’ estimate of $0.89 a share.
Final word
The management has already started implementing measures to compete more effectively in the ecommerce market. They have reported to focus on key customer segments, the SEO strategy and the enhancement of sales and marketing efforts to migitate the impact of the challenges that eBay is facing in the marketplaces business line. With the PayPal business about to be shelved off, the management are concentrating on the core business lines to grow the cash flow in the upcoming quarters. A lot is there to be unwrapped during this earnings call and thus analysts and investors are waiting eagerly for the earnings release which will throw light on how eBay’s marketplace business is performing and whether it could have a long-term impact on the top and bottom lines of the company.
