Although a tempered 2013 outlook and near-term macroeconomic caution in Europe and Korea are garnering most of the headlines from eBay’s EBAY second-quarter update, the company’s core businesses remain in a position of strength while key growth initiatives and technologies are gaining consumer and merchant acceptance. We remain impressed by user growth for Marketplaces (up 14.2% to 120 million users, the eighth consecutive quarter of accelerating growth) and PayPal (up 17% to 132 million active accounts, the sixth straight quarter of accelerating growth), and believe increased engagement from these consumers (many of which are younger mobile users with lower discretionary incomes at present, but also a lifetime of potential transaction growth ahead) will support management’s longer-term enabled commerce volume targets.

Adjusted operating margins fell 100 basis points to 26.3%, modestly below our expectations because of higher “test and learn” charge-offs in the Bill Me Later segment (but which also contributed to user and revenue growth), planned take rate cuts to stimulate large merchant growth, and consumer awareness, payment product innovation, and offline channel expansion investments. Although these pressures could linger over the next few quarters, we believe these investments will solidify eBay’s network effect–the foundation of our wide moat rating–as well as its enormous potential monetization opportunity in the years ahead.

We’ve incorporated second-quarter results and management’s updated guidance (full-year revenue and adjusted earnings per share at the lower end of the previously communicated ranges of $16.0 billion-$16.5 billion and $2.70-$2.75, respectively) into our model, but they were not material enough to change our $63 fair value estimate. We believe a price pullback could present a buying opportunity for a name that is well positioned to capitalize on longer-term


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