eBay's Value Is A Trap
Summary
- Company looks cheap on paper.
- But it's expensive considering the hurdles for growth are high.
- A "PayPal like" acquisition also seems unlikely with limited resources.
Justin Sullivan/Getty Images News
If you've been an investor in eBay (NASDAQ:EBAY) stock over the past decade, my condolences to your portfolio.
Total return on eBay stock over the past 10 years on virtually every time frame lags the total return of the S&P 500, let alone high-flying tech stocks like Tesla (TSLA) or close competitors like Amazon (AMZN).
Sure, the PayPal (PYPL) spinoff in 2015 was nice - but even that stock has underperformed the S&P 500 since inception, 62.84% for PYPL Vs. 84.53% for SP500TR.
By almost all finance 101 metrics, eBay stock is "cheap".
- P/E (fwd) 11.78x
- P/S (ttm) 2.84x
- 1.68% Yield
If it makes you feel good buying stocks with multiples a textbook tells you are low - be my guest. However, in order to have achieved "alpha" investing in eBay would have required you to sell it during the brief moments it outperformed the S&P 500.
In my nearly 2 decades of investing - I've met many investors that can look at a P/E ratio and determine if it's "high or low". More rare is meeting an investor who can perfectly time buying & selling these stocks when it briefly outperforms.
Multiple Expansion
So for eBay to truly be an alpha investment you either need to time the markets perfectly (not something I can do) or you need eBay to expand its multiple.
A couple of ways stocks can do this are as follows:
- Increase revenue growth
- Increase margins
- Increase cash flows
- Acquisitions
- Vertically integrate
- Hype
Let's address each of these starting with increasing revenue growth. First, let's look at eBay's Y/Y revenue growth dating back to 2019 - with forward estimates courtesy of analysts.
eBay Y/Y Revenue Growth
| Year | Revenue | Growth |
| 2024* | $10.48B | 4.6% |
| 2023* | $10.01B | 2.8% |
| 2022* | $9.74B | (6.5%) |
| 2021 | $10.42B | 17% |
| 2020 | $8.90B | 19% |
| 2019 | $7.43B | (14%) |
*Estimates Via Seeking Alpha
Yes, eBay benefited (like many companies did) from the effects of the pandemic. Collectibles - one of the few categories eBay still holds a significant advantage over competitors like Amazon, boomed during the stay-at-home era.
However, we are now seeing the impacts of higher gas prices and spending back into travel categories take away eBay's pandemic era high-teens revenue growth.
In fact, revenue growth is expected to turn negative in 2022 and slow to a low single-digit growth rate in 2023 and 2024.
Very few stocks trade with a premium multiple growing low single digits on the revenue side.
Could eBay reaccelerate its revenue growth?
Sure, but will be difficult. Obviously simply more Gross Merchandise Volume - or GMV - does the trick as eBay simply skims fees off the top of all those transactions.
Unfortunately this can be lumpy and difficult to project at best. We already see evidence GMV is reverting back to pre-pandemic levels on eBay. Additionally the rise of competitors in the ecom space has increased the options sellers have as opposed to the glory days of eBay when the site was one of the only games in town.
Speaking of competition - we know that broadly the more competitive a marketplace is - the profit margins tend to be squeezed.
From a gross margins perspective, eBay's senior citizen like age is a benefit since the company's major R&D buildout is long over.
eBay Y/Y Gross Margins
| Year | Revenue | Gross Profit | Gross Profit % |
| TTM | $10.02B | $7.3M | 73% |
| 2021 | $10.42B | $7.8M | 75% |
| 2020 | $8.89B | $7.1M | 80% |
| 2019 | $7.43B | $5.8M | 79% |
| 2018 | $8.65B | $6.6M | 77% |
Data: Seeking Alpha
High gross margins are often a hallmark of high multiple stocks, but it's almost always coupled with a high revenue growth rate, which eBay does not have.
However, it's actually operating margins where eBay not only shows its age, but the impacts of competition as well.
eBay Y/Y Operating Margins
| Year | Revenue | Operating Income | Operating Margin |
| TTM | $10.02B | $2.6B | 26% |
| 2021 | $10.42B | $3.0B | 28% |
| 2020 | $8.89B | $2.6B | 30% |
| 2019 | $7.43B | $1.8B | 25% |
| 2018 | $8.65B | $1.8B | 21% |
Data: Seeking Alpha
While eBay often passes down selling fee price increases, there's theoretically a limit to the percentage the company can take before the seller decides to use another platform.
Certainly the phenomenon of supply & demand isn't new, but companies like Tesla can seemingly raise prices without impacting demand much at all (hence the large multiple).
In short, eBay is in a tough spot. In order to raise operating income it needs to raise selling fees - which turns away sellers and drives them to sell on other competitors sites. And/or the company has to cut operating expenses ... which leaves eBay vulnerable to becoming even more of a relic of the past.
Where you really see eBay's inability to expand its multiple is from cash flows.
eBay Y/Y Cash Flows
| Year | Cash Flow | Revenue |
| TTM | $1.4B | $10.0B |
2021 | $2.7B | $10.4B |
| 2020 | $2.4B | $8.9B |
| 2019 | $3.1B | $7.4B |
| 2018 | $2.6B | $8.7B |
Data: Seeking Alpha
Despite eBay's revenue increasing from $8.7B in 2018 to over $10.4B in 2021 - operating cash flows were essentially flat.
Without pricing power eBay's ability to generate accelerating cash flows will be impossible. Companies that can't grow cash flow on higher revenue rarely achieve premium multiples.
The final 3 ways eBay could expand its multiple are through acquisitions, vertical integration and just plain hype.
Acquisitions have always been a mixed bag with eBay. Certainly there are highlights like acquiring PayPal in 2002 for $1.5B. But that comes with major flops like GSI Commerce for $2.4B in 2011 and Skype for $2.6B in 2005.
Among a plethora of other acquisitions ... most meant to keep competition from cropping up & taking market share, eBay will find it difficult to expand its multiple with this strategy. Additionally, the company has just $1.7B in cash equivalents, stagnant cash flow, and a strict regulatory environment - likely meaning a big acquisition is almost impossible.
Finally, eBay could expand its multiple through vertical integration - similar to how Amazon has achieved this via AWS, warehousing, delivery, advertising, Prime, etc.
Seems unlikely with low single digit cash flows and cash on hand. The right management team & leader could probably convince (hype) some shareholders it's possible, but pigs rarely fly.
Conclusions
If you're buying eBay because it has a "low" P/E or multiple - you're paying a hefty price.
The company needs to increase revenue, expand margins, and/or pull off an acquisition à la PayPal in order for the market to care. With limited resources and a highly competitive marketplace - it seems unlikely eBay is able to achieve any of this.
I would avoid eBay.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of TSLA, AMZN either through stock ownership, options, or other derivatives. 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.