Is eBay a Hidden Gem in E-commerce?

As ever more customers are turning to online retail, global e-commerce revenue is projected to grow at an annual growth rate of 9.5%, reaching an astonishing volume of $6.48 trillion by 2029.

Among the most promising e-commerce firms now is arguably one of the original pioneers in the space, eBay (NASDAQ:EBAY). Here’s why.

Revenues Climbing In Spite of Flat GMV

As of the last fiscal year, eBay’s technology connects buyers and sellers across 190 markets globally. What makes eBay stand out is its auction-style platform, where users can bid on items and potentially buy them at lower prices, much like a traditional auction.

Like many online retailers, eBay’s success relies heavily on its gross merchandise value (GMV) growth. In recent years, however, eBay’s annual GMV has been declining. While GMV fell by 15% between 2021 and 2022, the decline slowed to just 1% between 2022 and 2023.

On the other hand, eBay’s revenue trajectory has been more positive. The company focused on expanding its promoted listings and improving its payment services, leading to a better take rate.

As a result, revenue growth has outpaced the decline in GMV. Although eBay’s top line decreased by 6% between 2021 and 2022, it grew by 3% between 2022 and 2023.

Last year, macroeconomic headwinds led to lower traffic volumes, which contributed to the GMV decline. However, after posting a net loss on a GAAP basis in 2022, the company returned to profitability in 2023, an optimistic sign for its future.

eBay primarily earns revenue from fees on paid sales, including payment processing and first-party advertising. In 2023, eBay’s total ad revenue was over $1.4 billion.

Starting in 2020, eBay began building more specialized category experiences to become the preferred partner for sellers. Last year, this strategy was revised to better align with the evolving future of e-commerce.

Strong Cash Flows Support eBay

On the growth front, eBay’s first quarter of fiscal 2024 was modest, but the company still exceeded its guidance. Net revenues increased by 2% year-over-year to $2.56 billion, surpassing the projected range of $2.50-$2.54 billion. Quarterly GMV grew by 1% year-over-year to $18.6 billion, slightly above company expectations of $18.2-18.5 billion.

Although management anticipated that revenue growth would continue to outpace GMV growth in 2024, it expected this trend to be less significant. eBay’s first-party advertising products generated $370 million in revenue for the quarter, a 30% increase from the previous year.

Growth has not been as strong as some other e-commerce leaders, but eBay’s financial stability over the past few quarters is worth shining a light on, especially given the drag from the broader economy.

The company’s liquidity and strong cash flows are also undoubtedly a competitive advantage. In Q1, eBay generated $615 million in operating cash flow and $472 million in free cash flow. And the company returned $638 million to shareholders, including $499 million in share repurchases and $139 million in cash dividends, a fact that no doubt has attracted investors with a keen eye for strong fundamentals.

In April, eBay reached an agreement with Collectors, the parent company of cards and collectibles authenticator PSA, to acquire Goldin, a leader in the trading cards industry. As part of the deal, eBay sold its vault to PSA. The transaction is expected to enhance eBay’s marketplace offerings.

Since 2021, eBay has managed payments for all marketplace transactions for a simplified, end-to-end payment experience that helps attract and retain customers.

The company is also focused on growing its first-party ad revenue by expanding its suite of “promoted listings.” At the same time, eBay has been reducing its focus on non-strategic third-party advertising, which shifts the focus from lower-margin to higher-margin opportunities.

Is eBay a Hidden Gem in eCommerce?

eBay appears to be a hidden gem in the eCommerce with 19 analysts upgrading their earnings estimates for the upcoming quarter.

The broadly bullish sentiment among analysts is mirrored internally with management buying shares aggressively, signaling that those in-the-know believe the stock is likely undervalued.

It’s no surprise when you look at the company’s high gross margins and history of profitability In addition to the fact that the $1.08 dividend payout that corresponds to a 1.83% yield has been hiked in each of the past 5 years.

While the range of analysts forecasts stretches as high as $81 per share, the consensus now sits at a closer to $57 per share, suggesting that a pullback would be ideal before a more attractive entry point is reached.

Notably, a dividend stable growth model pegs fair value substantially higher, nearer the most optimistic analyst target, at $79 per share. A 10-year discounted cash flow forecast model also projects eBay can rise to as high as $80 per share.

If there were one drawback, it’s that eBay does operate with a fairly chunky level of debt of $6.1 billion but it’s not sufficient to deter investors from the stock entirely. Nonetheless, it’s worth keeping a close eye on it to ensure it doesn’t rise to a level that really drags on financial performance.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.