eBay Inc (EBAY) Taps New Streams of Cash

eBay Earnings ReportUsers of eBay Inc (NASDAQ:EBAY) have noticed something interesting that value investors should be paying attention to. The Internet staple has transformed itself from a questionable and, at times, sleazy auction site into a genuine online marketplace reminiscent of Amazon.com, Inc. (NASDAQ:AMZN).

eBay’s New Sources of Cash

In the past few years eBay Inc (NASDAQ:EBAY) has been implementing all sorts of new programs that make it easier to sell stuff through the site. A prime example of these programs is the Global Shipping Program, which enables a person to ship items to many foreign destinations at the same cost as shipping in the U.S.

That would let a comic book store owner in Topeka ship an old issue of Spider-man to a collector in Glasgow, Scotland, for the same price as shipping to Los Angeles. The program takes care of the customs and other hassle. All the comic-store owner has to do is click the box for Global Shipping Program when he sets up his listing to dramatically increase the number of potential customers.

That greatly increases the market for a lot of products and small businesses. It also increases the potential cash flow for eBay Inc (NASDAQ:EBAY) by increasing the number of fees that it can charge.

Global Shipping is only one of several new programs eBay has set up in its effort to turn itself into a retail marketplace—a sort of global flea market, where almost everything is for sale. There’s also eBay Giving Works, which lets sellers donate a portion of their profits to charity. That enables thrift stores and other good causes to sell through eBay and increase their potential take while helping eBay make a profit.

eBay Programs = Cash

Is eBay Inc (NASDAQ:EBAY)’s new strategy actually working and bringing in more cash? So far the answer seems to be yes. Between December 2010 and March 2013, eBay’s revenues rose from $9.156 billion to $14.54 billion, an increase of over $6 billion in less than three years. In the same period eBay’s cash from operations increased from $2.746 billion to $4.24 billion.

There is one worrying, or rather interesting, indicator though: eBay Inc (NASDAQ:EBAY)’s free cash flow peaked at $1.089 billion in December 2012 then fell to $638 million in March 2013. That indicates eBay is behaving more like a traditional retailer with heavy dependence on Christmas shopping. eBay’s free cash flow fell by almost half in just two months.

This isn’t as bad as it looks, because the company that most resembles eBay Inc (NASDAQ:EBAY)—Amazon.com—saw its free cash flow fall from $3.055 billion in December 2012 to $3.04 billion in March 2013. The company was actually reporting extra cash at a time when Amazon.com, Inc. (NASDAQ:AMZN) was reporting negative cash flow.

What’s more interesting is the way that Mr. Market values eBay and Amazon.com, Inc. (NASDAQ:AMZN). On July 12, 2013, Amazon was trading at $302.91 and eBay at $55.27. The latter looks like a bargain because it has demonstrated that it can maintain constant cash flow and Amazon cannot.

The PayPal Question

There is an interesting problem with eBay Inc (NASDAQ:EBAY) though: how much of its profits are really coming from its subsidiary, PayPal. Ownership of PayPal means that you can categorize eBay as a financial services company as well as a retailer. PayPal has been moving aggressively into new areas such as credit cards, mobile commerce, and financial services for brick and mortar retailers.

If PayPal is carrying the load for eBay, what happens if it gets spun off in an IPO or sold to a financial services company? How much of eBay’s cash flow is coming from PayPal, which operates year round? Retailing is a seasonal business—as Amazon’s cash numbers prove—while financial services hold steady year round.

The question we need to ask ourselves is this: Can eBay survive or at least be taken seriously as a retailer without PayPal? That’s hard to answer because PayPal is an integral part of eBay’s current business strategy.

The best answer is that if eBay Inc (NASDAQ:EBAY) retains PayPal and keeps on its current course, it can create a serious online marketplace that is a credible alternative and a real threat to Amazon. This marketplace will also be a real value investment because, unlike Amazon, it will generate a steady cash flow.

The article eBay Taps New Streams of Cash originally appeared on Fool.com and is written by Daniel Jennings.

Daniel Jennings has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. Daniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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