Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

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Can eBay survive without PayPal?

It looks as if eBay Inc. (NASDAQ: EBAY) might not be able to survive without its cash cow, PayPal Holdings Inc. (NASDAQ: PYPL).

The most recent set of eBay financial numbers, those for Fourth Quarter 2015, contain some very bad news for eBay and its stockholders. In particular, the revenue situation looks very grim for eBay.

The online auctioneer’s revenues have taken a very dramatic drop over the past few months, falling by $9.11 billion dollars during the fourth quarter of 2015 alone. eBay reported a TTM revenue of $22.36 billion right before it spun PayPal off in June; by December 2015 that number had fallen to $13.25 billion.

eBay Lost a Lot of Cash with PayPal

These numbers show us that jettisoning PayPal might cost eBay dearly. Its net income in June 2015 was $2.4 billion, but that had fallen to $1.72 billion by December, definitely a better situation than the revenue figures but still worrying.


Even more bothersome was eBay’s cash from operations, which fell by $1.283 billion between June and December. The eBay/PayPal combination reported generating $5.316 billion in cash from operations in June 2015; by December 2015 eBay alone reported $4.033 billion in cash from operations.

There was some good news in other areas at eBay; its free cash flow increased, rising from $758 million in June to $911 million in December. eBay also had $6.131 billion in cash and short-term investments. This is down from $10.55 billion in June but better than September, when the number was $5.301 billion. Some of eBay’s other figures were pretty good; it had a profit margin of 20.54% and a return on equity of 11.93%.

So it looks as if eBay is profitable, but its cash flow and revenue have dropped considerably. From these figures, it looks as if PayPal was sustaining eBay with the momentum of its growth and cash flow. Yet eBay is still a company with a lot of cash, and that cash in the bank at least is growing.

eBay’s Biggest Problem: Lack of Resources

This brings us to eBay’s problem: a significant lack of resources compared to its biggest direct competitor, Inc. (NASDAQ: AMZN).

Amazon reported $19.81 billion in cash and short-term investments on December 31, 2015, a $5.38 billion increase over September, when it had $14.43 billion in the bank. That gives Jeff Bezos a lot of cash to play with and a level of spending that competitors like eBay might be able to cope with. What’s even more frightening for eBay is that Amazon reported a TTM revenue of $107.01 billion on December 21, 2015. That means Amazon’s TTM revenue grew by $6.42 billion in a period of three months; its revenue was $100.59 billion in September 2015.


This means Amazon’s sales and market share are growing at a rate of around 6% a quarter. That enabled the Everything Store to add $18.02 billion in just a year; its revenue grew from $88.99 billion in December 2014 to $107.01 billion in December 2015.

Unfortunately, it is not clear if that growth came at eBay’s expense or whether it was market share taken from more traditional retailers such as Walmart Stores Inc. (NYSE: WMT). We will not be able to tell just how much Amazon is affecting eBay’s revenue until next year.

Can eBay Avoid the Amazon Effect?

It is possible that eBay might be able to avoid much of the Amazon effect because it is largely a niche player. It specializes in used merchandise and auctions, two areas that Amazon competes in indirectly.

Amazon’s biggest threat to eBay is in its ability to bundle services and goods, for example, to offer free shipping on both that box of laundry detergent and the copy of that old Stephen King novel a customer wants or to offer both reruns of The Man in the High Castle and underwear.

SAN BERNARDINO, OCTOBER 29: Employees arrive at Amazon's San Bernardino Fulfillment Center October 29, 2013 in San Bernardino, California. Amazon's 1 million-square-foot facility in the economically hard-hit San Bernardino County has created more than 800 jobs at the center. Fulfillment centers are where products sold by other vendors on store their inventory. (Photo by Kevork Djansezian/Getty Images)

To this is added the sheer convenience of using Amazon and the very low prices. For example, 100 bags of Lipton’s black tea at my local Kroger’s subsidiary City Market are currently selling for around $5, yet I found 312 bags of the same tea for sale on Amazon for $9.98 with free shipping.

These capabilities and the growing ecommerce efforts at companies like Walmart indicate that eBay could quickly get pushed into a niche of showing the stuff that does not sell on Amazon or, worse, as a sort of bargain basement alternative for the tiny minority of people that hate Amazon.

This means that eBay is not that great of an investment right now even though it is a very cheap stock. This company’s future is simply too uncertain to be a value, so stay away until eBay demonstrates it can survive without PayPal.

Disclosure: the writer owns shares of Kroger, eBay and PayPal.