Having started as a humble website for hosting online auctions, eBay Inc (NASDAQ:EBAY) has since become an online commerce hub. Its two most valuable assets — eBay.com and PayPal — are trusted and utilized by an enormous number of merchants and customers. Their value will only continue to grow as commerce continues to move online and onto mobile phones — online commerce is growing at a 14% compound annual growth rate compared to just 5% for all retail. eBay Inc (NASDAQ:EBAY) is perhaps the best-positioned company in the world to take advantage of this enormous tailwind.
Network effect
Competitors to both eBay.com and PayPal face a chicken and egg problem where companies need a lot of customers in order to offer an adequate value proposition. Meanwhile, PayPal already has a network of over 112 million customers and has partnered with a wide array of major retailers. PayPal’s customers enjoy the wide acceptance by merchants, while the merchants enjoy PayPal’s large customer base — it would be extremely difficult for a new entrant to compete with PayPal.
However, Amazon.com, Inc. (NASDAQ:AMZN) can certainly compete with eBay.com and is one of only a handful of companies that might be able to effectively compete with PayPal. In addition to dominating the online retail landscape by selling its own products through its website, Amazon.com, Inc. (NASDAQ:AMZN) also provides a compelling value proposition for merchants. It allows merchants to sell products through Amazon.com and even provides order fulfillment services among other options provided to merchants.
In addition, Amazon.com, Inc. (NASDAQ:AMZN) has over 200 million customers — much more than eBay.com and PayPal — and is growing at a high rate.
However, more likely than not, both Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) will find room to thrive while online commerce expands at a rapid pace.
Growth potential
The first way in which eBay Inc (NASDAQ:EBAY) can expand its presence in the global marketplace is by going local. Customers have shown a strong desire to order and pay online to avoid lines and pick up the purchased items in the store. eBay is rolling out a solution to enable merchants to offer mobile remote purchasing items and rapid consumer adoption makes this a huge growth opportunity.
More exciting is the potential growth in cross-border trade and transfers. International trade is both a logistical nightmare and can be expensive — but eBay Inc (NASDAQ:EBAY) can leverage its scale to offer a compelling value proposition in this market.
For cross-border transfers in particular, PayPal will have to compete with The Western Union Company (NYSE:WU) — the transfer payment industry titan. However, Western Union’s main competitive advantage is its 500,000+ agent locations around the globe that can facilitate transactions for unbanked senders or recipients. Although PayPal could never match Western Union on transfers for unbanked customers, it can compete for transactions with bank accounts on both sides (e.g., a buyer in the U.S. and a merchant in the U.K.). Western Union has no competitive advantages when it comes to banked customers, so PayPal could easily leverage its brand and integrated offering to compete for these highly profitable transactions.
Shareholder return
Besides the enormous growth opportunity in front of eBay, investors should also get excited about the company’s recapitalization efforts. Over the last few years, eBay has been taking on additional debt. Too much debt can be extremely risky, but eBay was — and still is — inefficiently capitalized. As a result, the company can continue to borrow money and invest in growth that will ultimately pay off for shareholders.
The stock trades at a 5% yield of normal free cash flow based on applying its historical free cash margin to its current sales level. In other words, in a normal year, eBay’s current assets will produce free cash flow equal to 5% of the current market capitalization.
However, eBay is growing at a double-digit pace — 13% annualized since 2008. If it can grow at just 5% per year, shareholders will get a double-digit return on their investment. If it can grow faster than that, investors will earn a lot more money.
The article Explosion in Online Commerce Will Lift This Stock to New Highs originally appeared on Fool.com and is written by Ted Cooper.
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