Baird analysts Colin Sebastian and Rohit Kulkarni take a close look at eBay Inc (NASDAQ:EBAY) in light of recent events and new numbers.

ebay

Yesterday, eBay Inc announced that it led a $134 million round of funding in Indian online marketplace Snapdeal. This investment follows the $50 million funding round and partnership with eBay established last year. We believe Snapdeal’s marketplace-oriented business model is complementary to eBay Inc (NASDAQ:EBAY)’s business model and consistent with the company’s strategy to grow aggressively in emerging markets. eBay already generates >50% of Marketplace revenues internationally. Moreover, we see such investments as leading to cross-border synergies.

Snapdeal accelerates eBay’s emerging markets presence

Founded in 2010, Snapdeal started as a Groupon-style deal site, but later evolving into an eBay-style marketplace connecting buyers and sellers, primarily through fixed price transactions. To date, Snapdeal has raised >$200 million in funding, for the most part contributed by eBay Inc (NASDAQ:EBAY). For context, media sources cite Snapdeal’s CEO as forecasting $1 billion in gross merchandise volume in 2014 yielding roughly $100 to $140 million in revenues, with 20 million registered users. eBay Inc (NASDAQ:EBAY) will continue operating its own Indian website, although this deal could end up promoting Snapdeal’s larger merchants on eBay’s other sites. While eBay Inc has a track record of following minority investments with outright acquisitions, we note there is a mix of approaches: for instance, the company operates two separate brands in Korea, and still maintains a <20% minority stake in MercadoLibre in Latin America.

E-commerce growth at early stages in India

According to Devin Wenig, head of eBay Marketplaces, Indian e-commerce market is poised to accelerate helped by improvements in payments, delivery/logistics, and smartphone penetration. Industry reports estimate annual e-Commerce spend at roughly $10 to $12 billion (or <2% online penetration of overall retail), and growing 50% annually. Key players include Flipkart (Amazon-style full-service online retailer with roughly 15% to 20% market share), followed by Snapdeal (~ 10%) and a series of vertically focussed players such as Jabong, Myntra, FashionAndYou, Inkfruit, DealsAndYou, Yebhi.com, Caratlane, and HomeShop18.com. We also note that Amazon.com, Inc. (NASDAQ:AMZN) established an e-commerce presence in India last year, using the Marketplace model (no physical inventory) – similar to eBay and Snapdeal.

Maintain Outperform rating

While downside risk may be limited by the high value of PayPal and Carl Icahn’s recent activism, positive catalysts are difficult to foresee without accelerating Marketplace growth and/or positive momentum at PayPal from Mobile/POS initiatives.