eBay | Fundamental Analysis | MUST READ...

Shares of eBay plummeted immediately after the release of its third-quarter financial results on Oct. 27, despite strong revenue and earnings numbers. Weak earnings forecasts came into focus as the ongoing store relaunch negated a temporary boost in online sales during the pandemic.

However, during the peak of the COVID-19 crisis, new management made changes that could improve eBay's long-term prospects. The question for investors is whether the latest numbers indicate continued stagnation or offer a path to further growth in the online marketplace.

Admittedly, the quarter showed a mixed picture. Gross Merchandise Volume (GMV) fell 10% year-over-year to $19.5 billion as sales activity declined from an unusually high level in 2020. Nevertheless, eBay now retains a larger percentage of that transaction volume as revenue, up 11% to $2.5 billion.

Unfortunately, that growth wasn't enough to boost earnings: earnings per share fell 50% year-over-year to $0.43. Adjusted earnings, which exclude the effect of fair market value adjustments on Adevinta's business, rose 9% to $0.90 per share. Free cash flow also declined slightly, by 4% to $502 million for the quarter.

For the current period, the company's management forecasts revenue growth of between 3% and 5%. That slowdown sent the stock down 9% on the day earnings were released, but the stock has since largely recovered. In the year to date, eBay stock is up more than 50%.

A key factor for investors to consider is the change in direction of the company under CEO Jamie Iannone. Previously the head of eBay, Iannone returned to the company after leading e-commerce sales at Walmart. When he took the job in April 2020, revenues were growing at a rapid pace as closed stores encouraged consumers to shop online. Now that sales are slowing as the economy returns to normal, the new environment puts Iannone's vision to the test.

Nevertheless, Iannone has made significant changes over the past 18 months to revitalize the e-commerce company and confront serious challenges from Amazon, growing e-commerce players such as Etsy, and other platforms such as Facebook Marketplace.

Under Iannone's leadership, eBay has reduced the number of steps required to list items on the site by introducing a new listing tool to simplify the process. The company also enabled eBay's mobile storefronts and QR coding to speed up the process of getting an item. In addition, the company has added a managed payments system, which should allow sellers and customers to use digital wallets.

eBay is also targeting higher-end buyers. Thanks to these changes, the number of active buyers on the site is down 5 percent year-over-year to 154 million. But more than half of that user base is what the company calls "low-value shoppers," a group that makes up just 5 percent of total sales. According to Iannone during the third-quarter reporting conference, the number of high-value shoppers is up 6 percent since 2019 amid an overall decline in the number of shoppers.

One way to attract these important customers is to launch Promoted Listings Advanced Beta. It builds on the existing Promoted Listings platform, which allows highly ranked sellers to bid on the top slot in a given search. Promoted Listings revenue is up 9% year over year, and moves like this should attract the type of sellers that will eventually provide higher GMV and revenue.

With the worst effects of the pandemic behind it, the company is embarking on important changes that should make it more competitive in the long run. An improved user experience and more engaged buyers, among other efforts, are encouraging signs of what a reborn eBay could look like.



The market appears to be impressed by these changes, as eBay stock is up 45% this year. Management is confident enough about its prospects to increase its stock repurchase plan for this year from $2 billion to $5 billion. Experienced investors should pay attention and put eBay on their list of stocks to watch.