EBAY: Betting Big on the Future of Retail

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Artur Pylak

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May 8, 2014

EBAY: Betting Big on the Future of Retail

EBAY intends to be the company that leads the way to the future of retail, seeing itself as far more than an e-commerce marketplace and an e-wallet payments solution. These present day businesses are part of a broader integrated vision of merchandizing that hopes to reinvent and combine compelling online and in store retail experiences to delight customers and remove obstacles to buying, and to help merchants earn more business from a growing base of well-targeted customers while lowering their costs. To that end, EBAY offers online design and hosting, warehousing and logistics, customer affinity programs, in store technology solutions, and merchandising strategy consulting on top of its well known Marketplace and PayPal offerings. This strategy appears to be paying off, as the sales enabled by EBAY have kept pace with archrival AMZN, and the company’s own revenues have grown at a better than 14% pace over the past 3 years, while profits have accelerated to similar growth in recent quarters. Still, we see EBAY’s success as by no means assured. Powerful rivals, such as GOOG, AMZN, WMT, VISA, and others, are pursuing important parts of EBAY’s agenda, and while none is implementing an integrated merchandising strategy as quickly or as completely, there is no assurance that EBAY will be able to fully exploit its early mover advantage. The threats to the core businesses are real, but so are their current growth and profitability. With a modest valuation and an option on the “future of retail”, EBAY is an intriguing investment.

  • The vision. EBAY believes that future online shopping will be tied intimately to brick-and-mortar stores, with customers moving easily between the two, enticed by value, convenience and personal engagement, with low friction sales completed to the delight of consumers who will want to come back for more. By enabling this integrated vision, earlier and more completely than its would-be rivals, EBAY believes that it can forge sustainable relationships with merchants and consumers, monetizing via its e-commerce marketplace, its PayPal payments service, and through technology and service sales to retailers. The key will be creating value for both consumers and retailers through a significantly improved shopping experience, in store AND online – increased convenience, lower costs, fewer impediments to completing sales, and improved customer loyalty.
  • EBAY Marketplace positions itself as the “Anti-AMZN”. EBAY’s Marketplace offers retailers an online channel without the inherent conflicts of AMZN, which captures valuable customer data for its own use and forces 3rd parties into pure price competition. EBAY is working with its partners to counter AMZN’s innovations – e.g. same day delivery will be available in 25 markets in 2014 – while supporting merchants by operating separately branded sites, reserving purchase data for the exclusive use of retailers, and managing logistics and payments if necessary.
  • However, EBAY is at considerable disadvantage. EBAY’s 2013 gross merchandizing volume was $76.5B, up 13% YoY, yielding $6.8B in revenue, from 128M users. In contrast, AMZN likely generated $150B+ in GMV, up more than 38% YoY, with $60.9B in sales under its own banner, and $7.6B in fees from its marketplace partners, selling to 237M active customers. AMZN investment in delivery infrastructure and IT has dwarfed EBAY’s over many years, as Jeff Bezos plows ALL of his profits back into the business, almost certainly yielding significant competitive operating cost and performance advantages. Moreover, many of the largest retailers may prefer to pursue their own, independent online strategy – e.g. WMT – and others may bite the bullet and work with AMZN anyway, particularly if it agrees not to keep data related to transactions. Given AMZN’s extraordinary scale, reach, technology and efficiency advantages, EBAY Marketplace’s growth and profitability is by no means assured.
  • PayPal faces many obstacles. EBAY’s PayPal has an enviable head start in the emerging field of mobile payments, but the slow development of the market in the face of entrenched players and the conflicting agendas of powerful rivals threaten to thwart its ambitions. Adoption and use of e-wallet solutions has been disappointing thus far, as solutions have not improved convenience or cost vis a vis credit cards for consumers, and the fragmentation and implementation costs of solutions have made it impractical for merchants to adopt them. PayPal has struggled to convince enough of either to constitute a critical mass, and has been unable to convince consumers to use bypass credit card fees by funding purchase directly from their bank accounts. Meanwhile, alternative solutions from 1) large retailers (the MCX consortium, Starbucks), 2) financial players (Visa, Amex, etc.), 3) online rivals (Google Wallet, Apple iBeacon, etc.), and 4) startups (Square, Stripe, etc.) threaten to further fragment the market, potentially blocking PayPal from gaining the scale necessary to be sustainably profitable.
  • EBAY Enterprise could be the secret sauce. The 2011 acquisition of GSI Commerce, now called EBY Enterprise, brought merchant services – web site development and hosting, warehousing and logistics, and merchandizing strategy support – into the fold. This business is EBAY’s smallest, but the most important to the company’s strategic vision. Ostensibly, the stand-alone Marketplace and PayPal operations will be stronger embedded into a platform that helps retailers 1) find attractive potential customers; 2) entice those consumers to shop online or in store, 3) complete sales surely, quickly and cheaply; 4) optimize the efficiency of keeping inventory and delivering products to customers; and 5) give incentives to keep good customers coming back for more. Enterprise, with its emphasis on retail technology and merchandizing, could allow EBAY to differentiate its Marketplace and payments solutions by delivering solutions with real value to both merchants and consumers.
  • Running alone. While the list of potential competitors is intimidating – AMZN, GOOG, AAPL, VISA, MC, WMT, etc. – the reality is that none of them is focused on transforming the overall shopping experience to nearly the extent that EBAY is. If EBAY is right, and if the paradigm shift in brink-and-mortar retail plays out as suddenly and completely as other parts of the cloud-era transformation, the company may be in an enviable position to capitalize. The company’s recent repatriation of $9B in foreign cash (incurring a $3B tax obligation) has led to speculation on potential M&A targets – Pinterest, Etsy, Square and Stripe top most lists – but we think deals would likely focus on retail tech for enhancing the in store experience, tracking customers online and in store, and analyzing customer data. Enabling big retailers to compete successfully with AMZN through well thought out integrated merchandizing solutions is EBAY’s only game, and the company is committed to playing it.

EBAY – Is Retail Ready?

EBAY is betting that the retail revolution happens sooner rather than later. As an online commerce marketplace, it is a scrappy number two. In 2013, it enabled $76.5B in 3rd party commerce, selling to 128M users, and generating $6.8B in revenues, up nearly 12% YoY. This sounds good, but at the same time, archrival AMZN enabled $90B+ in 3rd party commerce, selling to 237M users, and generating $7.6B in revenues, up 40% YoY (Exhibit 1). Add in that AMZN sold another $60.9B or so in merchandise from its own retail operation, and that Wall Street has, thus far, given Jeff Bezos carte blanche to reinvest his potential profits back into the business, building logistics and IT prowess, moving to same day delivery, adding product categories, and attacking new geographies. EBAY is feeling the heat, potentially squeezed between the largest retailers, who may band together or go it alone, and the small fry, who may feel that they have no choice but to go with AMZN to get its incomparable customer reach.

PayPal has first mover advantage, delivering profitable 19% sales growth, but its total payments volume of $180B is a small drop of the $20T+ in global credit, debit and pre-paid payments (Exhibit 2). Card leader VISA, with $4.5T in annual payments under its banner, is nearly 25 times larger, with an embedded base of issuers, merchants and consumers that will make it extremely hard to displace. VISA, its traditional rivals, MC and AMEX, and issuing banks like JPM, are eying electronic payments with substantial urgency. Meanwhile, a consortium of major retailers, led by WMT and comprising 70 partners with more than $1T in annual transactions, is forging its own mobile payments solution – cutting out the traditional credit card players and e-wallets like PayPal to the greatest extent possible. Similarly, the big mobile device platforms, GOOG and AAPL, are also eying payments, along with a raft of well funded start-ups, like Square and Stripe. Against this, mobile payment products to date have not motivated consumers to shift from their ubiquitous and already convenient credit cards. With competition looming, PayPal needs to kick start the process, and soon.

EBAY hopes that kick comes from Enterprise. Built from its 2011 acquisition of GSI Commerce, eBAY Enterprise offers integrated merchandizing services to large retailers – web site management, order management, customer service, warehousing and logistics, etc. By bundling these services with its marketplace and payments, and adding new capabilities, like in-store technology and analytics, EBAY hopes to enable a new paradigm that bridges e-commerce and brick-and-mortar retail. We believe in this vision – a selling process that finds valuable customers online, entices them to buy and eliminates obstacles to purchase, efficiently handles logistics, and helps merchants build loyalty by delighting consumers with compelling experiences, convenience and value, whether on-line or in store. EBAY’s would be competitors are behind it in building the capabilities needed to sell such an integrated solution.

IF EBAY can win, then it can win big. The global “omni-channel” of consumer retail sales is north of $15T, and the online portion less than 7%. As the retail paradigm shift really shifts into high gear, and we think it will, EBAY will be looking at a huge addressable market. The problem is timing, and here the tea leaves are unclear. Despite success stories like the Apple Store and Starbucks, truly disruptive retail models are rare. Merchants are intrigued, but cautious and unprepared. Consumers are nonplussed, and have been slow to bite on many new retail concepts. Still, however threatened, EBAY’s core businesses are still delivering profitable growth and its valuation is modest. For investors, the option on the “future of retail” happening sooner rather than later may be worth it.

Exh 1: eBay versus Amazon – GMV per Account, 1Q2012-1Q2014

Exh 2: Global Payment Volumes, PayPal versus V/MA/AXP 2011-2013

The Future of Shopping

Imagine you are interested in buying a blender. After checking out various models on line, and visiting several e-tail sites, you put the search on hold and get back to work. At lunch time, you head out to the local mall, and as you pull into the parking lot, a notification hits your phone. A retailer at this mall has the blender in stock, and is willing to sell it to you for a 5% discount today. After grabbing your sandwich, you stop into the kitchenware ware store and a greeter addresses you by name and offers to show you the blender, mentioning that the latest model from the same manufacturer is also available for $15 more. After a demonstration of the advantages of the new model and a quick online price check, you click the buy button on your phone, pick-up the box from the shelf and walk right out of the store, purchase completed without waiting in line and with confidence that you got a great deal on a product that really suits your needs.

Imagine that you have a favorite suit that fits you just right, and you are interested in buying another that fits just as well, but in another style and fabric. An online fitting room lets you see lifelike renderings of you “wearing” various virtual suits. Your detailed measurements are already on file, so a single click could place the order, but, perhaps, you want to feel the fabric and see similar suits in person. Having already narrowed down your options, the visit to the store is efficient – the sales rep has already set aside examples in your basic size to demonstrate the styles and fabric types that you already specified. You check out your full size avatar wearing a rendering of your top choice on a big screen monitor in the shop, perhaps selecting a few of the recommended ties after seeing them with the suit, give your approval and walk out. A week later, the suit and ties are delivered to your home, perfectly altered to your body. Perhaps for your next suit, you won’t even bother to come to the store.

Imagine you are going to the grocery store. Your non-perishable items – toilet paper, dishwasher detergent, canned tomatoes, dried pasta, etc. – are delivered to you each week after a quick scan of the recommended items, a bit of quick editing, and a click. You could get your meat, fish, produce, and baked goods delivered by the same day service, but you like to pick them out for yourself. When you walk in the store, your phone, equipped with Bluetooth and the grocer’s app, beeps with a few notifications. One announces a special on short ribs, a cut that you have frequently purchased in the past. This whets your palate and you click on the notification to pull up a few recommended recipes. One, linked from a popular cooking blog, particularly strikes your fancy and a further click adds the ingredients to your shopping list. As you move through the store, your cart notifies you of the items on your list. Another notification prompts you to check out the demonstration area in the middle of the store, where based on the record of your previous shopping, you are offered tastes of products of possible interest to you. A new organic pasta sauce turns out to be delicious, and you decide to buy a jar, automatically adding the brand to your list of preferred non-perishables for next week’s orders. When you pass the frozen foods on your way to check out, the cart reminds you that you haven’t bought ice cream in a while and offers you an e-coupon for a pint of Cherry Garcia. Lent is over, so you grab the Ben & Jerry’s along with a quart of chocolate for your kids. Check out is quick – many of the items were pre-scanned when you picked them up – and your items are bagged and heading to your car without delay.

Imagine you are dining out at a restaurant. You booked your reservations from your smartphone, and when you walk in the door, the hostess greets you by name and checks to see if you are waiting for the others in your party. She takes you to your table, and five minutes later brings your dining companions as well. The waiter stops by with the menus, bringing the bottled water that has always been your preference on previous visits, and mentions that the seasonal fish special tonight is a lot like a dish that you had enjoyed a year ago. You and your companions order drinks, and after deciding to order the special, you open the wine list. The sommelier, notified that the list is open, stops by to consult. A year ago, with that fish dish, you had ordered an Alsatian Riesling and she recommends a wine in a similar style. You agree, and while she goes to fetch the bottle, the waiter comes back to take the order. After a sumptuous meal, including a delicious shared dessert, compliments of the chef, to celebrate your recently passed birthday, you pull out your smartphone. Without having to flag down your waiter for the check, you review your itemized electronic bill and click, with your customary tip automatically added. Your waiter, busy giving great service to other tables, doesn’t have to be involved with the payment, and you and your party get up and leave, satisfied and happy. The next week, the restaurant follows with an email offering you a table on Thursday at 8PM, a time and day on which you have often dined out in the past, and you decide to take them up on it.

Exh 3: The Mobile Payments Landscape

eBay is Betting on Sooner

The future of shopping will built on many individual technologies that we already have – mobile platforms, big data analysis, in store display and information technology, integrated inventory and logistics systems, electronic payments, on-line product search and comparison engines, customer tracking and affinity programs, etc. Still, integrating existing piece part technologies into integrated and transformative retail experiences is a big leap for retailers, most of which are far, far from the leading edge of IT innovation and many of which are loathe to stir the pot with changes to their merchandizing strategies, much less make the sizeable investments necessary to reach for the brass ring.

Thus far, most of the technology companies eying retail have sold piece parts. Amazon will handle your warehousing and shipping if you offer your products through their eponymous marketplace. Apple has a nifty Bluetooth node to track and communicate with iPhone users who enter a store. Square has a nifty solution for processing credit cards at point of sale. Google will help you use customer data to target your advertising to the right consumers. A few cutting edge retailers have taken on the task of using technology to remake their own merchandizing. Apple Stores, with wireless check out in the aisles, and Starbucks, with mobile device ordering and payments, come to mind, but these stories are few and far between. Some other merchants have articulated big plans – WalMart is looking to take on Amazon with its own aggressive online retail operation, using its store locations as part of its warehousing and delivery operations, and has recruited an all-star team of retailers to its mobile payments consortium MCX (Exhibit 3). Still, most retailers are sitting on the sidelines with a death grip on their wallets, gamely coping as consumers with smartphones brazenly use their aisles to “showroom” products that they will ultimately buy from the lowest priced competitor online. If consumers can embrace the value of a compelling in store experience, one well integrated with their online shopping, that helps to discover and evaluate products, and that thoughtfully rewards loyalty, perhaps an expensive revamping of a merchant’s merchandizing operations and strategy would be an excellent investment.

In this nervous environment, eBay is resolutely stepping forward. It has some piece parts. eBay Marketplace offers a platform for 3rd party merchants to sell their products online, an alternative to Amazon which offers tremendous reach, but which competes directly with its retail partners, co-opts their customer data for its own use, and subsumes their own branding beneath its own, leaving 3rd party merchants to compete with each other on price and availability alone. PayPal is the market leader in online electronic payments processing, and is pushing to serve consumers offline as well via its mobile payments app. These growing and moneymaking businesses are tied together by the smallest and newest business unit, eBay Enterprise. Born from the 2011 acquisition of CGI Commerce, Enterprise offers a broad range of merchandizing services to retailers, including website design and hosting, inventory management, order processing, logistics, payments processing, data analytics, and in store technology. With this leap, eBay hopes to be the vendor of choice in facilitating the kind of future retail experiences described in the last section.

Exh 4: eBay Revenue by Segment Q1 2012 – Q1 2014

Trying Harder May Not Be Enough

eBay’s Marketplace business unit is delivering profitable double digit annual sales growth, repping big brands and small on its popular website, alongside its longstanding consumer-to-consumer auctions business (Exhibit 4). In this, eBay positions itself with merchants as the “anti-Amazon”, eschewing direct competition, sharing consumer data, and enabling vendor specific branding. This approach has had some success, with leading retail brands like Target, Toys R Us, Best Buy, and others selling under the eBay flag. On the consumer side, eBay has worked hard to differentiate its shopping experience, using its abundant user data to drive a compelling user interface that intelligently draws buyers toward products in which they are likely to have interest, and that removes obstacles to buying. This is a lot harder than it may seem, and eBay deserves a lot of credit for building a well designed interface fronting an abundant selection of merchants and products, selling to a large and growing global market.

Still, eBay is playing catch up. eBay boasted 128M regular users at the end of 2013, Amazon had 237M. eBay facilitated $76.5B in sales for its retail partners last year, while we estimate Amazon enjoyed nearly double that volume from its combined internal operation and its 3rd party sellers. eBay’s Marketplace revenues, from the commissions and fees that it charges its merchant partners, were up more than 12% YoY in 2013, which sounds good until you factor in that Amazon’s 3rd party sales were more than 10% higher and growing at more than three times the pace. Add in that Wall Street seems to have granted Amazon and its CEO Jeff Bezos special dispensation from the pressures of having to deliver quarterly profits, enabling eBay’s fiercest rival to plow would-be margins back into investments in shortening delivery windows, adding new product categories, entering new geographies, and improving its already formidable data processing capabilities. eBay – which has admirably delivered strong net profits in its last 10 quarters, adjusting for the one-time tax charge in the most recent report – has no such free pass. Amazon’s R&D spending runs more than 4 times the level eBay’s, as does its net PP&E after its extraordinary CAPEX blitz over the past four years (Exhibit 57). We believe that Amazon is putting all of this investment to good use.

Exh 5: eBay versus Amazon – Quarterly R&D Expense, 1Q2004-1Q2014

Exh 6: eBay versus Amazon – Net PPE, 1Q2004-1Q2014

Exh 7: eBay versus Amazon – Quarterly Capex Spend, 1Q2004-1Q2014

Long term, this is trouble for eBay. Real innovation in managing logistics, efficiencies stemming from massive investment, and economies of scale would be likely to widen the growth and underlying profitability gap between the two, all else being equal. The good news is that the transition of the gigantic $15T global retail market from domination by brick-and-mortar merchants toward a new paradigm that weds physical stores to mobile e-commerce is still in its early stages. Online merchants account for an estimated $1T in global sales, just over 6% of the total and growing at nearly a 20% pace, with eBay responsible for about 7.5% of the overall global e-commerce volume, behind the Chinese behemoth Alibaba and archrival Amazon (Exhibit 8-11). That is a LOT of runway left, assuming that CEO John Donahoe can pick up the pace.

Exh 8: e-Commerce in perspective, 2013

Exh 9: B2C Global E-commerce, 2012-2017

Exh 10: U.S. e-Commerce quarterly sales and share of all retail, Q1 2000- Q4 2013

Exh 11: U.S. e-Commerce quarterly sales and share, Q1 2012 – Q4 2013

Exh 12: Merchant Customer Exchange Participating Merchants

Payments – What’s In It for Me?

The idea of using a cell phone for payments is not a new one. More than a decade ago, vending machines in mobile mad Scandinavia and Japan began accepting payments by text message. Mobile pre-paid accounts as a store of value for general payments began rising in emerging markets that lacked widespread consumer banking. These use cases addressed real consumer pain points – the inconvenience of carrying coins, the lack of a bank account – and have endured. However, the well hyped introduction of the mobile e-wallet, installed on smartphones with NFC communications chips, and intended to replace the swipe of a plastic card at point of sale with a wave of the device, has been widely considered a dud.

Mobile payments applications are dependent on a network effect. To be successful, a payments solution must be adopted by critical masses of both retailers and consumers. Unfortunately, merchants are hesitant to invest in supporting a new payment scheme without reasonable expectation that the application will be used by many of their customers and that it would also deliver some sort of operating advantage to the retailer. Similarly, consumers will not adopt unless a mobile payment solution gives them a real benefit relative to using their credit cards at retail establishments that they frequent. Unfortunately, pulling out your smartphone at checkout is no more convenient than swiping a credit card. Mobile payments solutions have got to do better than that.

There may be some rumblings of change. Starbucks, who’s well-heeled and tech savvy customers visit their shops with unusual frequency, is the poster child for a new version of mobile payments. 14% of the company’s US purchases are made via its mobile app, which automatically bills the customer without a swipe of a card. Uber, the fast-growing transportation service, is another company that seems to have gotten mobile payments to work, allowing its customers to jump out of the car at the conclusion of a ride without having to settle up with the driver.

Against this backdrop, a number of other mobile payments solutions, in various stages of development, have begun to receive hype. WalMart has gathered 69 of its closest retailer friends to form the MCX consortium, which is working on a merchant driven mobile payments solution that will retain customer data for the exclusive use of the retailer and potentially enable them to drive down the transaction fees charged by credit cards (Exhibit 12). Google and Apple have dabbled in payments, with Google delivering a robust solution for online payments that has yet to be successfully translated to brick-and-mortar commerce, while Apple, in addition to bragging about the 800M credit card numbers that it has on file, has offered iBeacon, an intriguing, but proprietary, device that allows retailers to easily communicate to iPhones that happen to be in range. The credit card players have an obvious vested interest in mobile payments, with the networks primarily working to ensure that everyone else has to keep using their lucrative services and issuers looking to maintain control over the customer relationship and to leverage their transaction data. Finally, a raft of start-ups, Square and Stripe most prominent amongst them, are groping to find a profitable place to play.

None of these solutions has anything approaching traction with consumers, and all of them have struggled to define incentives for shoppers to adopt them. While the obvious lure is financial incentives, like the rewards programs and cash back offers that credit card issuers have used for many years, we think the more powerful approach will be in improving the overall shopping experience. That is the driving force behind the success of Starbucks and Uber. Starbucks app users can order their beverages ahead of time, to get through the line more quickly and be more certain that the order is taken accurately – the payments aspect is integrated into the benefit of a more convenient and personalized experience. The Uber app allows its customers to assess how quickly a car could be available, to track the driver on the way to a timely and hassle free pick up, and to skip the inconvenient process of settling up with the driver at drop off. Again, the payments function is embedded within a redesign of the service itself, adding obvious benefits in the form of reduced delays and greater convenience. We believe this redesign of the shopping service will be key to the adoption of mobile payments technologies.

PayPal – Yes, Carl, There are Synergies

PayPal is the biggest payment solution on the web, with 148M digital wallets, annual transaction volumes exceeding $180B, with an enviably low 0.27% loss rate. It is growing nicely – users and revenues are both up nearly 20% YoY – and profitable, with 24% segment margins (Exhibit 13-14). It has very strong data analysis capabilities and experience in managing credit risk. It has a strong anchor from eBay’s own growing Marketplace and momentum with 3rd party merchants, including $27B in mobile purchases, up almost 100% YoY (Exhibit 15). That is all good news.

Nonetheless, as a stand-alone business, PayPal is subject to the same criticisms that we have leveled at competing general purpose mobile payments operations. While it offers obvious value for internet shoppers – providing a trusted repository for sensitive financial information and saving consumers the trouble of constantly entering their credit card numbers – the benefits to shoppers in brick-and-mortar stores are minimal. If eBay is to establish PayPal as a viable long term mobile payments mechanism, it is going to have to deliver that value, and if others deliver that value before eBay can, PayPal’s strengths and first mover advantage will be to no avail.

Exh 13: Ebay / PayPal Payments Metrics, 1Q 2013 – 1Q 2014

Exh 14: Ebay/PayPal Payments Transaction Volume, 2005-2013

Exh 15: PayPal Mobile Transaction Volume, 2006-2013

However, PayPal is not a stand-alone business. Merchant relationships from the Marketplace business are important to PayPal, and add a nearly unique ability to apply purchasing data on consumers to their shopping activities online and in stores. As eBay extends those merchant relationships to broader parts of the merchandizing process – website design and hosting, inventory management, logisitics, customer targeting, loyalty programs, etc. – payments can become a value-added part of these solutions. The biggest challenge will be translating that into incentives for consumer adoption in the traditional shopping world. This is the province of eBay’s newest, smallest, and perhaps most important business unit, Enterprise.

Changing the Way We Shop

eBay bought GSI Commerce in 2011, bringing a range of merchant support services, such as web site management, data analytics, digital marketing support, order processing, warehousing, and logistics, and an impressive list of customer relationships, such as Toys R Us, Target and BestBuy (Exhibit 16). These capabilities greatly enhanced eBay Marketplace, providing significant additional value to merchant partners and bringing GSI’s large retail clients on board. Importantly, GSI, now renamed eBay Enterprise, also provides the building blocks for redesigning the retail customer experience – digital marketing services to find high-potential customers and draw them in; commerce technology to manage their online presence and bridge it into the store, and multichannel operations to design and deliver inventory systems, logistics and customer care spanning on and off line. This is the stuff of those future shopping experience vignettes we presented in the opening paragraphs of this report.

If eBay gets this right, it will begin transforming retail for its merchant clients, embedding its marketplace and payments as elements of a broader paradigm-busting integrated merchandizing solution. Consumers will want PayPal on the smartphones because it will work with in store technologies to eliminate waiting, and facilitate better customer service. More consumers will visit and buy from eBay marketplaces because it will anticipate their tastes, present the right products in a particularly appealing way, and complete their transactions and deliver their purchases without delay. More merchants, with attractive and unique product offerings, will partner with Marketplaces because of the usefulness of its data and the integration into their physical retail operations. Enterprise’s customer engagements and financial progress will be key indicators of eBay’s progress.

Exh 16: Recent eBay Acquisitions, Last 3 Years

Recently, eBay repatriated $9B of its overseas cash, incurring a $3B tax liability in the process. Many have painted this move as a prelude to further acquisitions, and the early speculation is that the company might have its eye on online arts and crafts marketplace Etsy, social interests bulletin board Pinterest or mobile payments start-ups Square and Stripe. However, understanding CEO Donahoe’s commitment to “omnichannel” retail and using technology to help retailers bridge the worlds of online and in store, we believe that future M&A is likely to focus on bolstering eBay’s capabilities in Enterprise. In store shopper tracking and customer service startups like Nomi, Euclid, Retail Next, Shop Kick or Aisle 411 would help in defining solutions to deliver customer delight. Retail data analytics firms like Retention Services, Skytree or Graph Drive could add tools to help merchants indentify likely buyers and to build loyalty with their best customers.

To Buy or Not To Buy, That is the Question

eBay has a jump on the competition now – its likely rivals are well behind on articulating an integrated cross-channel retail vision and in assembling the building blocks to deliver it. However, if the vision is materially wrong, takes too long to play out or if eBay simply executes poorly, the rivals may have time to catch up. These are real risks to the strategy.

Still, 14% top-line growth in 2013 with better than 32% EBIT margins is nothing to scoff at, particularly trading at a less than 15x forward P/E Given the sheer magnitude of the opportunity in front of eBay, and with agreement on the long term vision for a new retail model, we think it is likely a good bet for investors. We advise vigilance as to the development of the new paradigm retail market, the progress of those deep pocketed rivals (AMZN, GOOG, AAPL, VISA, WMT, etc.), and eBay’s execution in delivering more tightly integrated retail solutions.

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