Feb 11, 2011
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Ebay points to PayPal momentum, pledges innovation

Feb 11, 2011

Feb 10 - EBay Inc thrust its PayPal business into the limelight on Thursday, saying the online payments unit would surpass its main marketplaces division within three to five years as executives cast the Web company as an innovator.


Shares of eBay, which over the past two years has sought to shed an image of an Internet has-been, jumped nearly 8 percent during an investor meeting at eBay's San Jose, California headquarters, after executives said PayPal revenue could double by 2013.

"PayPal is the star of the company and people we talk to are investing in eBay for the PayPal aspect," said BGC Partners analyst Colin Gillis.

Although eBay has pointed to PayPal as its prime growth driver in recent years -- fueled by more new consumers and businesses adopting the service and using it more frequently -- questions about competition and the regulatory environment for payment processors are still a concern among investors.

At the same time, many investors remain underwhelmed by the more familiar marketplaces unit, a high-margin unit that connects online buyers and sellers but is largely mature.

Executives sought to allay those concerns on Thursday, focusing on innovation and eBay's position at the forefront of shopping and payments.

Those efforts would send adjusted earnings per share up between 10 percent and 14 percent by 2013 on total revenue of $13 billion to $15 billion, the company said.

Chief Executive John Donahoe said eBay was at an "inflection point" in e-commerce that the company would exploit, as consumers use smartphones -- a "store in their pocket" -- to shop and pay in one go.

"This shift is creating new global opportunities for our company," said Donahoe. "We are driving the next generation of e-commerce."

UBS analyst Brian Pitz said eBay's financial targets for 2013 exceeded Wall Street expectations.

"There are more bears than bulls and the guys that are negative will have to raise their numbers," Pitz said.

"They sound good, they're excited and they're making progress," he said of the company.

EBay was the pioneer of the Web auction during the dotcom boom, but the novelty of its marketplaces business eventually waned and growth faltered.

But due to ongoing improvements in search technology and trust and safety that has made shopping in eBay marketplaces easier and more secure, that unit is set to grow into a $7 billion to $8 billion business by 2013 from $5.7 billion in 2010. Operating margins will be 38 percent to 42 percent, executives said, compared with 40 percent in 2010.

At PayPal, revenue is expected to reach $6 billion to $7 billion by 2013, PayPal President Scott Thompson said, from $3.4 billion in 2010. PayPal revenue rose by 23 percent from 2009 to 2010.

Operating margins in PayPal will rise to 24 percent to 26 percent by 2013, up from 21 percent in 2010, Thompson said.


Despite the promise of continued growth at PayPal, eBay investors are anxious to feel reassured that marketplaces can still grow and be relevant in today's competitive environment -- especially as prime competitor Amazon.com, an online retailer, has enjoyed double-digit growth.

"I know the question that's on your mind: 'Can eBay compete in the U.S. market?' I believe we can," said Christopher Payne, vice president of Marketplaces North America.

EBay also has made a big gamble on mobile. Consumers can use eBay's mobile app with its scan technology to compare prices on smartphones while shopping, and use PayPal's app to make speedy purchases. At PayPal, total payment volume from mobile is expected to double to $2 billion this year, Thompson said.

Improvements, along with a strengthening economy and more consumer confidence, helped eBay post better-than-expected profit in its most recent fourth quarter when it reported results in January.

EBay shares are at about half the value of their all-time high in late 2004 despite improvements since 2009.

EBay is valued below other Silicon Valley tech giants, at 16.7 times estimated 2011 earnings. Google and Yahoo, meanwhile, are valued at 18 and 21.6 times forward-looking earnings, respectively.

EBay shares traded at $34.31 after hours on Thursday after closing at $34.49 on Nasdaq.

By Alexandria Sage

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