Can eBay survive without Its Cash Cow PayPal?

For the past few years eBay Inc. (NASDAQ: EBAY) has been sustained by a cash cow called PayPal Holdings (NASDAQ: PYPL). Now that cash cow has been gone for six months, which gives us a good opportunity to take a close look at eBay and see if it has a viable future as an ecommerce company.

eBay released its first set of post-PayPal financial numbers this month. As might be expected, those numbers are a very mixed bag. The financial data indicates that eBay will probably survive, but it might not be capable of substantial growth.

eBay Has Float

My prediction is that eBay will survive as a company because of the resources it has. For example, eBay had $6.131 billion in cash and short-term invests on December 31, 2015. The retailer also reported a net income of $1.725 billion and $4.033 billion in cash from operations for Fourth Quarter 2015.

These figures clearly show us that eBay’s business is still generating a lot of cash. The company’s business model gives it a lot of float, even if its growth prospects are limited. One potential problem at eBay is that a lot of that float is being generated by subscriptions rather than sales.

Even that could be to eBay’s advantage because the company had 162 million active buyers in Fourth Quarter 2015, according to Statista. That number was a significant increase over Fourth Quarter 2014, when eBay had 154 million active buyers. This indicates that eBay definitely has momentum; the problem is that momentum is not necessarily being translated into revenue.

In contrast to eBay, Amazon.com (NASDAQ: AMZN) had 304 million active users and $107.1 billion in revenue during the fourth quarter of 2015. This shows us that Amazon is far better at harvesting revenue than eBay. In particular, Amazon seems to know how to keep adding new revenue streams to its business model.

It looks as if Amazon has quality growth that actually translates into revenue, while eBay does not. Instead of more buyers, eBay could be attracting the online equivalent of window shoppers. That might mean that eBay is suffering from the Amazon effect; people go to eBay, see items, then check on Amazon to see if they can find them for a lower price.

Is eBay a Niche Player?

The revenue indicates that eBay is essentially a niche player in ecommerce, but it is operating in a very profitable niche—the niche being used items and collectibles, which are largely sold to hobbyists and enthusiasts. The danger is that it is a niche where Amazon has become a very aggressive competitor that is successfully stealing eBay’s greatest resource—its sellers.

Amazon is currently doing a much better job of servicing online sellers than eBay is. I recently shut down my sales operations at eBay because they were not making any money. At the same time, I was making money on Amazon, and it was not nearly as much hassle as selling through eBay.

Is eBay Driving Away Sellers?

A major reason why I prefer Amazon to eBay is that Amazon does not charge sellers to list items. The only Amazon sellers that pay fees up front are those that use its fulfillment services. It only collects a fee when something actually sells, and its listings are essentially permanent. Amazon also charges lower shipping rates, which also cuts operating expenses.

The number of sales I get on Amazon is also higher even though the Everything Store does not accept direct PayPal payments like eBay does. Strangely enough, that and other Amazon limitations, such as offering only fixed price sales, do not seem to scare away customers.

At the end of the day, I expend less time and effort to sell on Amazon and make more money. Since I do not think my experience is unique, it looks as if eBay has a major problem on its hands. It is slowly driving away its sellers, particularly with media reports of serious security flaws going unaddressed.

The real danger for eBay here is that sellers will leave and take inventory and revenue with them. Having less inventory will mean fewer customers and fewer sales. That means eBay’s market share will shrink over the next few years even though the company will remain profitable.

eBay is still a pretty good contrarian play in ecommerce because of its low price and the cash it generates. It is simply no longer a growth stock, because of the serious limitations to its business model.

Disclosure: the blogger owns shares of both PayPal and eBay and plans to hold them for a very long time.