Once a leader in the rapidly growing e-commerce market, eBay Inc. (EBAY) was being dismissed as past its prime. From a high of $46.99 set in intraday trading on Feb. 1, 2018, its stock sank to $26.01 on Dec. 26, a drop of 44.6%. Since then, it advanced by 52.1% through the close on Sept. 24, 2019. The S&P 500 Index (SPX) rose by 26.4% from its own intraday low of 2,346.58 on that same date.
Troubled Legacy Business
While eBay has 182 million active buyers globally, gross merchandise volume, the value of all goods sold on its sites, has been declining. It fell by 4.4% year-over-year (YOY) to $22.6 billion in 2Q 2019, Bloomberg notes. "They still have things to solve with their online marketplace business," as RJ Hottovy, an equity analyst at Morningstar Inc., indicated to Bloomberg.
Hedge fund Elliott Management Corp., an activist investor, argues that the market was valuing eBay on the basis of its declining legacy auction business. Meanwhile, they claimed, eBay's fast-growing StubHub ticket reselling and Classifieds Group units were being overlooked, Barron's reports.
KEY TAKEAWAYS
- eBay's core auction business has been in decline.
- A plan to unlock shareholder value has sparked a rebound.
- Activist investors propose spinning off StubHub and raising dividends.
- eBay's new payments platform competes with PayPal.
- Promoted listings are increasing sources of revenue.
- A new international partnership seeks to spur growth.
Plan to Unlock Value
In January, Elliott Management Corp. sent eBay executives a five-step plan to achieve a stock price between $55 to $63 by the end of 2020, representing a gain of 39% to 59% from the close on Sept. 24, 2019. "The Company possesses all the tools to right its ship: strong assets, an invaluable community of loyal users and the ability to fix its operational issues," Elliott's letter stated, as quoted by MarketWatch.
Elliott proposed spinning off StubHub and eBay Classifieds businesses, leaving eBay executives to focus on revitalizing its core marketplace business. The hedge fund also indicated that eBay should "continue to return substantial capital to shareholders" and reverse a history of "inefficient organizational structure, wasteful spend and a misallocation of resources." Elliott has been given a seat on eBay's board, plus the ability to name two other board members.
"They have assets they can sell to generate cash and return to shareholders," observed Victor Anthony, an analyst at Aegis Capital Corp, per Bloomberg. "The reasons to own the stock remain valid despite the pressure on growth," he said.
“A lot of the plumbing is already in place to separate the companies, so we think the process will be quicker than the PayPal-eBay spin which involved a very complex commercial agreement for a core function within eBay’s marketplace," according to a note to clients from Ross Sandler, an analyst with Barclays, as quoted by Barron's.
Avenues For Growth
Advertising by sellers on eBay, was up by 130% YOY to $89 million in 2Q 2019, per Bloomberg. "Sellers are increasingly choosing to invest in promoted listings," as Devin Wenig, president and CEO of eBay, noted on the company's 2Q 2019 earnings call, as quoted by The Wall Street Journal. About 940,000 sellers used these promoted listings in the quarter.
Meanwhile, over 6,000 merchants use eBay's new payments platform, which processed gross merchandise volume of $270 million in 2Q 2019, up 24% YOY, per Bloomberg and the Journal. In 2020, eBay's agreement with 2015 spinoff PayPal Holdings Inc. (PYPL) ends.
To expand its international reach, eBay is partnering with Indian e-commerce startup Paytm Mall, taking a 5.5% stake in that company costing between $150 million and $200 million, the Journal reports. Paytm Mall's backers include Berkshire Hathaway Inc. (BRK.A), SoftBank Group Corp. of Japan, and Chinese e-commerce giant Alibaba Group Holding Ltd. (BABA).
Earnings Outlook
The 3Q 2019 earnings report from eBay is expected to be released between Oct. 28 and Nov. 1, per Yahoo Finance. The consensus estimate calls for EPS of 64 cents, up from 56 cents in the same period of 2018, an increase of 14.3%. In 2Q 2019, EPS of 68 cents beat the estimate of 62 cents by 9.7%.
With respect to revenues, the 3Q 2019 consensus forecast is $2.65 billion, for a slight YOY drop of 0.1%, and a decline of 1.4% from $2.69 billion in 2Q 2019.
Among the 38 analysts covering eBay, just 16, or 42%, rate it a buy or a strong buy. Their average price target is $42.21, a modest 6.7% above the close on Sept. 24.
