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eBay Inc (EBAY): It’s Time To Stop Worrying About This E-Commerce Giant

eBay Inc (NASDAQ:EBAY)E-commerce giant eBay Inc (NASDAQ:EBAY) has long lived in the shadow of, Inc. (NASDAQ:AMZN). With half the market value and none of Amazon’s cool gadgets, digital distribution platforms, or cloud-based storage, eBay has relied heavily on its popular digital payments platform, PayPal, to remain competitive.

Yet a direct comparison of eBay Inc (NASDAQ:EBAY) against, Inc. (NASDAQ:AMZN) wouldn’t be fair, considering that the former is an auction and consumer-to-consumer site whereas the latter is an e-commerce superstore. Investors, however, still tend to be much more forgiving when Amazon misses top or bottom-line estimates.

Earnings come up short

When eBay Inc (NASDAQ:EBAY) reported its second quarter earnings on July 18, shares plunged nearly 7%.

The company reported non-GAAP adjusted earnings of $0.63 per share, or $822 million, up 12.5% from $0.56 per share in the prior year quarter. Revenue rose 14% year-on-year to $3.9 billion. However, eBay’s earnings missed the consensus estimate by a penny, although its revenue topped the estimate of $3.89 billion. eBay’s top and bottom-line growth were actually quite stable compared to, Inc. (NASDAQ:AMZN)’s 36.9% decline in earnings and 21.9% growth in revenue last quarter.

Unfortunately, eBay Inc (NASDAQ:EBAY) spooked investors with its lackluster third quarter guidance, which called for earnings of $0.61 to $0.63 per share and revenue between $3.85 billion to $3.95 billion. Analysts had expected eBay to earn $0.65 per share on revenue of $3.97 billion.

Positive growth catalysts

During the second quarter, eBay’s most noteworthy growth was in three areas – PayPal, international sales, and mobile. PayPal’s user base grew 17% to 132 million and its total payment volume rose 24% to $43 billion. PayPal’s total revenue rose 20% to $1.6 billion, accounting for 41% of eBay’s top line. PayPal also expanded into six countries and signed agreements with over 50 merchant acquirers to use PayPal over Discover Financial’s payment network.

Meanwhile, eBay Inc (NASDAQ:EBAY)’s cross-border (international) trade came in at $11 billion, accounting for 22% of eBay’s total Enabled Commerce Volume (ECV). Lastly, eBay added three million new mobile customers during the quarter, growing its user base 90% year-on-year, representing positive growth potential in the critical segment of shoppers more frequently using smartphones and tablets to shop.

Despite that solid growth, it’s clear that investors were spooked by its earnings miss and weak guidance. Therefore, I think it’s interesting to see how eBay’s growth compares to some of its overseas equivalents.

MercadoLibre’s murky forex problems

One of eBay’s biggest overseas investments is its 19.5% stake in Mercadolibre Inc (NASDAQ:MELI), commonly referred to as the “eBay of Latin America.” Last quarter, Mercadolibre Inc (NASDAQ:MELI) reported an 11% decline in earnings on a 22.7% gain in revenue. MercadoLibre also has more robust margins than eBay Inc (NASDAQ:EBAY) and Amazon, as seen in the following chart.

However, MercadoLibre’s biggest challenge is balancing out its business growth across 13 Latin American countries, many of which have been hit by inflation that have distorted revenue growth. In particular, revenue from Venezuela and Argentina, which are experiencing hyperinflation yet report revenue at official exchange results, can be misleading.

For example, Venezuela, which accounted for 15% of Mercadolibre Inc (NASDAQ:MELI)’s top line last year, has enacted currency controls that prevent businesses from obtaining U.S. dollars, and commercial forex transactions value the bolivar at 75% less than the official exchange rate. A similar problem is also emerging in Argentina, which accounts for 25% of the company’s revenue.

This has led some analysts, such as Off Wall Street Consulting Group’s Mark Roberts, to speculate that MercadoLibre’s 2012 earnings should have been 20% lower if it reported revenue “at market” rather than the distorted official forex rates. Yet other analysts believe that the fear is overblown. JPMorgan analyst Andre Baggio stated that the devaluation of the Venezuelan bolivar and the Argentine peso would only impact its top-line growth by 8%.

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