Stocks to Watch in E-Commerce: eBay (and PayPal)

By Markets Fool.com

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Source: Steven Arnold (via Wikipedia).

There are few industries evolving more rapidly than e-commerce, and there's plenty of money to be made for those who get in while the business is still relatively young. In fact, of the $14.4 trillion total worldwide commerce market, only about $1 trillion of these transactions currently take place online. There are thousands of companies that stand to benefit from e-commerce growth, but one that will be especially interesting to watch in the coming months and years is eBay , which at the moment is like buying two companies in one.

Two strong companies in one
In July, PayPal will begin trading as a separate company under ticker symbol PYPL. For every eBay share owned as of July 8, investors will be issued one new share of PayPal, which will be distributed on July 17. The new PayPal shares will begin actively trading on July 20. So, if you want to get in before the split, the deadline to receive the newly issued shares as an eBay stockholder is rapidly approaching. While the intrinsic value of the businesses won't change as a result of the split, at least right away, there are reasons to like both eBay and PayPal over the long run.

eBay's core business is still a winner
As the company said in a recent presentation, an independent eBay will be able to focus exclusively on its core business of developing and operating an online marketplace. While its growth isn't quite as dramatic as PayPal's, eBay is still growing and has a lot more room to go.

As of the most recent quarter, eBay had 157 million active buyers, a number that's grown at a 12% annualized rate over the past three years. Revenue has grown by $1.4 billion from 2012 to 2014, and the company's free cash flow has increased at an impressive 32% annual rate.

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Source: eBay.

Mobile technology has been an extremely successful area of growth for eBay, and there's still room for improvement. So far, 266 million people have downloaded eBay's mobile app, and $28 billion of eBay's $83 billion in 2014 merchandise sales took place on mobile devices.

Despite the growth, eBay has tremendous opportunity to grow as more commerce continues to migrate online and eBay plans to capitalize on that figure by creating the most vibrant and engaging marketplace possible for its users -- an area in which the company has succeeded so far. eBay's users spend nearly three times as long shopping on the company's website as they do on other leading online retailers, and they also visit more frequently, so it's safe to say that eBay has already developed a competitive advantage in this regard.

Source: Flickr user paz.ca.

PayPal could be the real game changer
eBay is the more mature business out of the two, and PayPal is the one with more growth potential. With the online and mobile payments marketplace expected to grow into a $25 trillion addressable marketplace as technology evolves and expands, the long-term possibilities are limitless.

PayPal produced 22% year-over-year growth in transaction volume and added 19 million active customers in 2014, bringing its total up to 165 million. Revenue, payment volume, and free cash flow have all grown rapidly in recent years, and mobile payment technology is really having an impact on PayPal's bottom line -- accounting for 25% of transactions last year, up from just 12% in 2012.

Source: PayPal.

PayPal has several growth opportunities that could send revenue higher in the coming years, including peer-to-peer payments, lending transactions, and money transfers. There is also huge potential in the in-store payments marketplace. In fact, PayPal's mobile-payments technology could potentially replace debit cards over the coming decades. PayPal is projecting revenue growth in the 15% neighborhood over the coming years, which sounds rather conservative given the industry's potential.

Plus, with approximately $6 billion in cash and no debt, PayPal has a tremendous advantage over its competitors. Not only is PayPal on tremendous financial footing, but the company also has all the cash it will need to invest in growth and innovation as opportunities present themselves.

Risks
Of course, no stock is without risk, and eBay/PayPal is no exception. It's hard to envision that the transition to mobile technologies will slow down, but there's always the risk of decreased consumer spending, as we would see in a recession. If the economy took a turn for the worse and consumers tightened their spending habits, both eBay and PayPal would be likely to see revenue fall. Or the market could perceive any delays in the companies' split as a negative (though a temporary one).

And finally, there's always the risk of competition from other big-name e-commerce companies such as Apple and Amazon.com, and even from bricks-and-mortar retailers such as Wal-Mart as it expands its online-based offerings. However, I firmly believe that eBay and PayPal are the best at what they do, and shareholders shouldn't feel too much of a competitive threat from other companies.

The bottom line
eBay and PayPal are two excellent companies that investors should definitely consider for the long haul. Even though both businesses have grown and evolved tremendously, e-commerce as an industry has barely scratched the surface of its long-term potential, and both companies stand to benefit tremendously as the industry grows. If you want to get in while the two companies are still a package deal, the clock is ticking.

The article Stocks to Watch in E-Commerce: eBay (and PayPal) originally appeared on Fool.com.

Matthew Frankel owns shares of eBay. The Motley Fool recommends eBay. The Motley Fool owns shares of eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.