How High Can eBay Go?
The e-commerce sector is enjoying an unprecedented rise. Customers appreciate the convenience that online retail provides, lending popularity to the sector. This is why global e-commerce revenue is projected to show an annual growth rate of 9.5% to a projected market volume of $6.48 trillion by 2029.
While the sector expands, so does the prospect of established companies gaining bigger market shares. eBay (NASDAQ:EBAY), a former leader, has the hallmarks of emerging as a dark horse in this space, but how high can it go?
Key Points
- eBay is showing signs of improvement and growth amid a projected 9.5% annual rise in global e-commerce revenue.
- First-party advertising and promoted listings are driving revenue growth and financial stability, including a 30% increase in ad revenue earlier this year.
- While facing stiff competition from Amazon and Walmart, eBay is attractively priced, offering potential value to investors at a low earnings and sales multiple.
How Are eBay’s Fundamentals?
Popular e-commerce leader eBay operates in a not-so-common way to achieve results. The company started out as an auction website in 1995 that promoted an open marketplace, but it has grown into an online retail giant. The unique way people can try to win items at a lower price in an auction separates the company’s platform from its competitors.
eBay’s technology connects buyers and sellers across 190 markets globally, offering a unique selection as of last fiscal year-end. The company, like many online retailers, depends heavily on its gross merchandise value growth.
Over the past few years, the company’s annual GMV has been declining. However, between 2021 and 2022, GMV declined by 15%, while it declined by only 1% between 2022 and 2023. This could indicate a recent improvement in the company’s performance, even if the change doesn’t show enough improvement to excite most investors.
On the other hand, eBay’s revenue trajectory has been a bit better. The company chose to focus on expanding its promoted listings and enhancing its payment services. As a result of a better take rate, revenue growth has outpaced its GMV trajectory. Between 2021 and 2022, eBay’s top line decreased by 6% but it grew by 3% between 2022 and 2023.
Last year, macroeconomic conditions resulted in reduced traffic as was evident in the GMV decline. However, after posting a net loss on a GAAP basis in 2022, the company managed to return to profitability in 2023.
The company earns from fees on paid sales, which include payment processing and first-party advertising. Last year, eBay’s total ads revenue was more than $1.4 billion.
How Has the Start of the Year Been for eBay?
Growth-wise, eBay’s first quarter of fiscal 2024 has not been momentous, but the company still topped its guidance. The company’s net revenues increased by 2% from the prior year’s period to $2.56 billion (guidance was $2.50-$2.54 billion).
Quarterly GMV grew 1% year-over-year to $18.6 billion while the company was expecting it to be in the range of $18.2-18.5 billion. The company had expected the trend of revenue growth surpassing GMV growth to continue into 2024 but to a lesser extent. More importantly, its first-party advertising products raked in $370 million of revenue in the quarter, up 30% from the year-ago value.
Although the growth hasn’t been that big compared to some other market names, eBay’s financials have been quite stable over the past few quarters, which is a gain in itself considering the current macroeconomic situation.
The company’s liquidity has also been intact. In Q1, eBay generated $615 million of operating cash flow and $472 million of free cash flow. Furthermore, exhibiting shareholder commitment, it returned $638 million to shareholders, which included $499 million of share repurchases and $139 million paid in cash dividends.
In April, eBay entered into an agreement with Collectors, the parent company of cards and collectibles authenticator PSA, for the sale of Goldin from Collectors to eBay and the sale of the eBay vault from eBay to PSA. Goldin is an internationally well-known leader in the trading cards industry. The transaction was closed a month later, launching a suite of features that prop up the company’s marketplace offerings.
The company is also focused on growing its first-party ad revenue by pushing its suite of “promoted listings.” Simultaneously, it has started reducing its attention toward non-strategic, third-party advertising, basically moving focus from a lower margin to a higher margin category.
What Does The Future Hold For eBay?
Stability is the name of the game for eBay at the moment. Better monetization with its first-party advertisements should lead to higher revenues in spite of intense competition from big names like Amazon.com (NASDAQ:AMZN) and Walmart (NYSE:WMT).
On the other hand, the stock is trading quite cheaply. Its price sits at 10.7x earnings and only 2.8x LTM sales, which are pretty cheap compared to their corresponding industry standards.
Put those multiples together, and the future for eBay shareholders is likely quite bright indeed. One analyst has $65 as the target, but that may prove to be just a stopping point on a journey to higher elevations.
