eBay was once a game changer. When the internet was very young, and few businesses provided ecommerce, eBay was a pioneer. From humble beginnings selling Pez dispensers, eBay grew into a powerhouse.
Things we used to sell via garage sale we could now list on eBay. Small businesses could create stores on eBay to sell goods to customers they otherwise would never reach. And auction houses realized they could sell everything from chotchkies to fine art and heirloom antiques to collectors as well as designers they formerly could not find. eBay sales exploded, and traditional retail started its slide downward.
To augment growth eBay realized those selling needed a simple way to collect money from people who either could not, or would not use a credit card. To extend its growth, eBay bought fledgling PayPal for $1.5B in 2002, and this further promoted faster ecommerce growth. Paypal on eBay worked marvelously.
Paypal and eBay are similar size, but face very different competitive prospects
Times have changed. Now eBay and Paypal have roughly the same revenue, at about $8B/year each. But eBay has run into stiff competition, as CraigsList has grown to take over the “garage sale” and small local business ecommerce. Simultaneously, powerhouse Amazon has developed its storefront business to a level of sophistication, and ease of use, that makes it viable for businesses from smallest to largest to sell products on-line. And far more companies have learned they can go it alone with internet sales, using search engine optimization (SEO) techniques as well as social media to drive traffic directly to their ecommerce sites, bypassing on-line storefronts entirely.
eBay is in a Growth Stall
eBay was a game changer, but now is stuck in a business model that has become far less relevant. The result has been 2 consecutive quarters of declining revenue. By definition that puts eBay in a growth stall, and fewer than 7% of companies ever recover from a growth stall to consistently increase revenue by a mere 2%/year. Why not? Because once in a growth stall the company has already missed the market shift, and competition is taking customers quickly in new directions. The old leader, like eBay, keeps setting aggressive targets for its business, and tells everyone it will find new customers in remote geographies or vertical markets. But this almost never happens because the market shift is making their offering obsolete.
On the other hand, Paypal has blossomed into a game changer in its own right. Not only does it support cash and credit card transactions for the growing legions of on-line shoppers, but it is providing full payment systems for high growth providers like Uber and AirBnB. It’s tools support enterprise transactions in all currencies, including emerging bitcoin, and even provides international financial transactions as well as working capital for businesses.
Paypal is a game changer for banking
Paypal is increasingly becoming a threat to traditional banks, especially for consumer banking. Today most folks use a bank for depositing a pay check and making payments. There are loans, but frequently most consumer loans are shopped around irrespective of where the customer banks – much like credit cards, which most people acquire for their benefits rather than a relationship with the issuing bank. If customers increasingly make payments via Paypal, and borrow money via operations like Quicken Loans (a division of Intuit,) why do they need a “bank?” Discover Card Services, which now offers cash deposits and loans on top of credit card services, has found that it can grow substantially by displacing traditional banks.
Paypal today is at the forefront of digital payments processing. This is a fast growing market, which will displace many traditional banks. And emerging competitors like Apple Pay and Google Wallet will surely change the market further – while aiding its growth. How it will shake out is unclear. But it is clear that Paypal is growing its revenue at 60% or greater per quarter since 2012, and at over 100%/quarter the last 2 quarters.
Paypal may be undervalued, and eBay is most likely overvalued
Paypal is now valued at about $47B. That is roughly the same as the #5 bank in America (according to assets 12/31/14) Bank of New York Mellon, and number 8 massive credit card issuer Capital One, as well as #9 PNC Bank – and over 50% higher valuation than #10 State Street. It is also about 50% higher than Intuit and Discover. Based on its current market leadership, and position as likely game changer for the banking sector, Paypall is selling for about 8 times revenue. If its revenue continues to grow at 100%/quarter, however, revenues will reach over $38B in a year making the Price/Revenue multiple of today only 1.25.
Meanwhile, eBay is valued at about $34B. Given that all which is left in eBay is an outdated on-line ecommerce conglomerator, stuck in a growth stall, that valuation is far harder to justify. eBay is selling at about 4.25x revenue. But if revenues continue declining, as they have for 2 consecutive quarters, this multiple will expand. And valuation will be harder and harder to justify as investors rely on hope of a turnaround.
eBay was a game changer. But leadership became complacent, and now it is very likely overvalued. Just as Yahoo became when its value relied on its holdings of Alibaba rather as organic revenue gorwth as it lost share to rival Google. Meanwhile Paypal is the leader in a rapidly growing market that is likely to change the face of not just how we pay, but how we do personal and business finance. There is no doubt which is more valuable today, and likely to be in the future.
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Things we used to sell via garage sale we could now list on eBay. Small businesses could create stores on eBay to sell goods to customers they otherwise would never reach. And auction houses realized they could sell everything from chotchkies to fine […]