eBay Looks Like a Trap Ahead of Earnings

TheStreet.com

NEW YORK (TheStreet) -- There have been plenty of discussions lately about the rise of mobile payments.

Companies like Intuit and Square, which have begun to put pressure on the likes of VeriFone , have demonstrated the ability to service a growing need for person-to-person transactions.

I've chronicled the potential effect of Apple's entry into the realm of e-commerce. Unlike VeriFone, whose stock has lost roughly 50% of its value since we began following these developments, eBay , on the strength of its growing PayPal business, has gone pretty much unscathed.

Although eBay does deserve credit for having built up PayPal to operate with multiple financial networks around the world, I worry that eBay's long-term growth has become too reliant on PayPal's capabilities. With second-quarter earnings due out Wednesday, I'd be cautious about "bidding up" these shares, which are already expensive. (Shares were changing hands at about $56.62 Tuesday morning.)

I'm looking for earnings (excluding one-time items) to arrive between 62 cents to 63 cents per share on revenue in a range of $3.85 billion to $4 billion. The Street is a bit more optimistic, however. Analysts are expecting earnings per share of 64 cents on revenue of $3.89 billion, down from $3.95 billion three months ago.

Without question, along with Amazon , eBay is a force to be reckoned with in e-commerce. The question, though, is how much of eBay's long-term growth should investors rely upon beyond the strength of PayPal? Said another way, will eBay continue to serve as a thriving marketplace storefront for ecommerce or will the company migrate into a merchant/transaction business for PayPal? Both require different sets of expectations and assumptions.

But there are indications that management has begun to focus on the latter, which presents a different set of concerns altogether. Earlier this year, eBay inked a deal with NCR Corp. , which specializes in point-of-sale (POS) technology. The agreement allows for NCR's POS systems to integrate with PayPal's mobile services that will enable customers to pay for goods and services using their smartphones. The deal will also present PayPal users the option to use NCR's Convenience-Go app for gas stations and convenience stores.

That's all well and good. I applaud eBay's management for looking at all possibilities to expand PayPal's mobile capabilities further. I also won't argue that PayPal's reach will benefit greatly by more mobile adoption. The concern, though, is that these initiatives also push PayPal right into the crosshairs of Apple, which is rumored to have payment/e-wallet capabilities built into its next iPhone.

It remains to be seen what Apple's mobile payment services will look like. But it's safe to assume that any e-wallet functionality that Apple builds into the next iPhone, which will also include biometrics security, will have distinct advantages over a PayPal app. eBay's management is looking ahead -- thinking that the deal with NCR will help lessen the impact. It's a good gamble. But how much value will it bring?

What's more, we can't overlook that PayPal grew 6% slower in the April quarter than it did in the fourth quarter. Likewise, in terms of revenue, the figures were actually flat. Meanwhile, the marketplaces business was solid -- posting a 13% revenue increase, while also gaining 4 million additional users -- bringing its total to 116 million, a 13% increase. So is it going to be PayPal or the marketplace?

Management will have plenty more decisions to make. One of these decisions should involve buying Square to protect PayPal. Not only does Square makes it easy for small businesses to accept credit cards without installing a high-fee terminal like NCR, but the company is estimated to process close to $5 million worth of daily mobile transactions.

I'm not suggesting that eBay buying Square would completely mitigate Apple's arrival into the mobile payment space, but it would help eBay fight off smaller threats like Intuit, which has a product called GoPayment. Like PayPal, Intuit also allows users to accept credit card payments using mobile devices such as iPhones and iPads.

Until there is more clarity from eBay's management about the company's overall business, I can't (in good conscious) recommend these shares. It's hard enough to compete with Amazon in the online marketplace business, but with Apple emerging as a threat to PayPal in mobile payments, eBay's long-term growth potential is diminishing and the stock looks like a trap.

At the time of publication, the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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