eBay: Maybe The Shutdown Can Inject The Growth It Needs

Summary

• eBay shares have traded largely flat after reporting strong Q1 beats, with indications that trends have improved in March since the lockdowns began.
• Year-to-date, eBay's ~10% gains have beaten the overall market, but pales in comparison to Amazon's gains.
• The question is if higher revenue growth can be sustained once the shutdowns subside. Initial metrics are encouraging.
• eBay has taken a cautious stance to guidance, maintaining its outlook of flat revenue growth for Q2 and FY20.
• Upgrading eBay to neutral based on improving performance.

Heading into this year, nothing was going eBay's (NASDAQ:EBAY) way. Growth had stalled as both buyers and sellers drifted to competing platforms, and talks to sell the company's Classifieds division had stalled. But then, the coronavirus struck - and what has become a nightmare for retail businesses has proven a boon to e-commerce players like eBay and Amazon (AMZN).

eBay gave us its first look of how the coronavirus has impacted its business in reporting Q1 results. Despite beating Wall Street's expectations, shares of eBay have traded roughly flat since the announce; and though its year-to-date stock gains of just under 10% have outperformed the broader market, other e-commerce and remote-work stocks have soared much higher.

Data by YCharts

I have long been bearish on eBay, believing it to be dead in the water because of consistently slowing GMV growth and growing irrelevance in the e-commerce space. I acknowledge, however, that the stay-at-home ordinances and the fact that many people have little to do all day outside of online shopping and streaming TV may give eBay a much-needed jolt. The question remains to be seen if eBay can sustain this coronavirus-driven growth injection and grow its brand in the face of steep e-commerce competition - but with shares looking cheap at a ~13x forward P/E based on eBay's updated 2020 pro forma EPS guidance of $3.00-$3.05, I'd say eBay is worth a small gamble.

I'm upgrading my outlook on eBay to neutral; investors should continue to monitor stock movements and fundamental performance as the year progresses.

Q1 download: GMV began improving in March and took off even more in April

The most important update that eBay gave us in Q1 is that performance in its flagship Marketplace business has begun to turn around, thanks to the recent surge in online shopping that began to hit eBay in March. GMV has long been the number-one metric that investors focused on for eBay, and this was the first in many quarters that eBay's earnings release didn't spell out dire news - at least, relatively speaking. Take a look at the trends below:

Figure 1. eBay GMV trendsSource: eBay Q1 investor presentation

GMV trends accelerated in both the U.S. and worldwide. Though domestic GMV was still contracting at -4% y/y, it improved five points relative to a terrible -9% y/y showing in Q4; while international returned to +3% y/y growth. These GMV trends drove Q1 revenue of $2.37 billion (-2% y/y) - again, still negative, but substantially better than Wall Street's expectations of $2.32 billion (-4% y/y).

But eBay's Q2 and beyond could look even better than Q1. In his prepared remarks on the Q1 earnings call, CFO Scott Schenkel noted that April GMV was trending closer to 20% y/y, far above the flat performance that eBay delivered in Q1.

Before the dynamics surrounding COVID-19 started impacting our business in late Q1, our key metrics were performing better than our expectations through the first 11 weeks. The roll out of new and expanded experiences for buyers and sellers along with the acceleration in managed payments and ads were driving improvement in GMV and revenue despite the continued headwinds from Internet sales tax and reductions in marketing spend that skewed towards the U.S.

Since then, COVID-19 impacted our major markets as shelter-in-place actions were required and we saw an immediate change in the growth trajectory. In Marketplace, there was an initial surge in home confinement categories in late March, which then expanded in April across all verticals including parts and accessories, fashion and more. Since the start of April, GMV has been growing over 20% in our major on-platform markets every week."

Management has noted that the surge in demand spanned a wide variety of categories, including: "home offices, gym equipment, and indoor leisure activities like video games and consoles," while

Of course, the question is whether eBay's improved performance in March/April can be sustained into posterity. Is the sudden twenty-point improvement in eBay's recent performance a pull-in of future demand because people are bored and have no access to retail stores, or does it represent a turnaround in eBay's brand presence in the e-commerce landscape? Uncertainty on this question is what prevents me from being overly bullish.

Nevertheless, there's a case to be made that eBay's current guidance is leaning to the conservative side. eBay's revenue growth has always tracked closely alongside GMV growth, but eBay's Q2 guidance seems to diverge from the recent April performance (perhaps suggesting management's reluctance to believe the boost is permanent). For Q2, eBay is guiding to an essentially flat revenue range of -2% to +2% y/y, with the low end of that range representing no improvement from Q1 despite the boost in April GMV.

Figure 2. eBay Q2 guidance updateSource: eBay Q1 investor presentation

For the full year 2020, eBay again held its outlook at a flat -1% to +1% revenue range:

Figure 3. eBay FY20 guidance updateSource: eBay Q1 investor presentation

eBay's official statement on why the company was reluctant to move its outlook guideposts is as follows:

Given the dynamic environment, we are not revising our full year revenue and EPS estimates. This guidance reflects management's expectations for operational performance and the impacts seen in both of our Marketplaces and Classifieds platforms to date, but given the uncertainty surrounding the extent and duration of the impact of the COVID- 19 pandemic, it is difficult to predict what may result as shelter-in-place guidelines are eased and lifted and how global consumer demand, the effects of COVID-19 on the general economy, seller inventory and advertising spending may evolve over time."

However, even though eBay didn't increase its guidance, consensus actually called for eBay to slash it. Wall Street's consensus FY20 revenue was pegged at $9.51 billion, $50 million below the low end of eBay's stated range.

We do like the fact that even without any revenue upside for FY20, eBay is still projecting strong 12-15% y/y EPS growth, making its ~13x forward P/E look rather benign. The fact that eBay cleaved off the troubled StubHub division for $4.05 billion to Viagogo has helped the company become leaner, with operating margins improving 190bps to 26.5% in Q1 on a GAAP basis. If eBay does manage to generate revenue growth coinciding with its recent double-digit April GMV growth rates, earnings growth could be substantially stronger.

Key takeaways

Investors in eBay have long thirsted for GMV growth, and the coronavirus/shelter-in-place orders may finally give eBay that long-needed boost. As of now, eBay is careful to flow forward its 20% y/y April GMV growth into its FY20 outlook - but the fact that eBay is projecting flat Q2 revenues is almost certainly over-conservative.

Given that shares are cheap at ~13x forward P/E and haven't seen the enormous gains that other e-commerce stocks have seen this year, I believe eBay is worth a small bullish wager while we wait for further updates on a Marketplace turnaround.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[User 48953535]

Again, eBay's business is flat, where other eCommerce companies are showing an increase in sales volume.

Until this company embraces their sellers as partners, not adversaries, and actually invests money into site improvements instead of buybacks, this trend will continue.

The future of this organization will be tested when their Managed Payments program is implemented later this year. They are touting it as a success, but in reality (1) It has been fraught with problems (2) Only 25,000 sellers to date are participating, which is less than 1% (3) Many vendors (especially large sellers) are on record stating that they will leave eBay when this is forced onto them.

As of now, eBay is requesting that their sellers "pre-register" with their bank account and other information to prepare for the transition. Since the company who will administer this program is overseas, most are skittish about doing so. And they should be at least a bit nervous, as eBay itself has been hacked on more than one occasion.

One thing I have noticed as a 20+ year seller, is that, without exception, every time a new program or feature is introduced, there are glitches, and transitions are never smooth. When it involves the financial health and livelihood of those who solely supply eBay with their merchandise, it is crucial that their takeover of payments works correctly when fully launched.

[Wordsofmassdisruption]

EBay is the world’s largest garage sale! As retailers hit the wall, and the economy struggles to regain it’s footing, EBay’s auction format is best positioned to take advantage of the dispersal of goods (new and used) at cash out prices.