Wall Street Firm Citi Likes eBay's Marketplace Momentum
By Ina Steiner
EcommerceBytes readers hear a lot about eBay from two perspectives: that of company executives and that of online sellers. But it's interesting to read about other perspectives, and a new report out from Citi sheds light on how at least some on Wall Street view the publicly-traded company.
As eBay began targeting large retailers and brands 5 years ago (see Monday's "eBay Aggressively Courts Large Retailers Across Europe" - link), it heard a lot about the challenges retailers were facing on the "other" marketplace, Amazon.com. One common complaint was that Amazon competes with the retailers on its platform. eBay heard this loud and clear, and part of its sales pitch to retailers became, "we will not compete with you."
Wall Street takes that message to heart as a key differentiator between eBay and Amazon.com, and Citi's report on eBay this week led off with the premise that eBay is a "retail partner with marketplace economics" - and Citi also liked eBay's push into the offline retail world through GSI Commerce and PayPal:
Unlike Amazon, which started as a direct retailer and competitor to many of these businesses and still today generates more than 80% of its net revenue from first-party sales, eBay has always been a marketplace provider and partner, not competitor, to retailers.
More recently, and especially since the acquisition of GSI Commerce and PayPal's move to extend offline, eBay has started to tailor a solution for larger retailers in additional to its historically SMB-centric base. We believe eBay's position as a partner for "offline" retailers both enables it to address a large market opportunity, but also gives it unique advantages over Amazon.
Citi also noted another difference between the retail marketplace giants - Amazon has been building out warehouses across the country (and the globe). While this helps Amazon deliver goods more quickly, Citi focused on the cost of building a network of distribution centers and its effect on Amazon's margin:
Adding to this differentiation with Amazon is eBay's business model, which is asset-light and a classic marketplace model. As a result, eBay's FCF margin of 20% compares with 4% for Amazon.
eBay CEO John Donahoe has been talking about a "three-year turnaround plan" since he took over from Meg Whitman in 2008. Things were bad and got worse, but analysts have now deemed the turnaround a success, Citi referring to it in Monday's report as Marketplace Momentum:
Management's execution of the turnaround of core Marketplace has been impressive. And while increasing competition from Amazon is a risk, we believe
1) continued user improvements (search & discovery, product selection, etc.),
2) more competitive merchant pricing,
3) traction with its local commerce and large retailer solutions, and
4) above-average growth in international markets
should all contribute to enabling the company to at least meet its target of a 3-year CAGR (2012-2015) of 14%+ at core Marketplace.
Citi believes eBay can continue to improve through its "new homepage feed format with better product discovery, enhanced search functionality, category/selection expansion, further international expansion, etc."
The Wall Street firm is also watching eBay's new pricing structure that went into effect in the second quarter of 2013, "aimed at simplifying pricing (including reducing many upfront insertion fees) and making eBay more competitive in some categories with Amazon."
Citi said eBay expects a net neutral impact from the fee changes, while Citi sees a long term benefit. However, it's not sure what the near term impact will be on "overall take rates and on listings velocity."
Citi issued the report as it initiated coverage of eBay with a Buy rating, saying it viewed eBay as a core holding in the Internet sector, and the report discussed PayPal in depth as well. Citi initiated coverage of other Internet firms - see this report in Barrons.
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About the author:
Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to firstname.lastname@example.org.
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