The Bull Case For eBay

Online shopping brands have been some of the most successful businesses to have capitalized on the increasing digitization of the global economy over the last few decades.

One of the best known of these is eBay Inc. (EBAY), the San Jose-based American e-commerce giant that has seen its share price nearly triple since the beginning of the coronavirus crisis in March 2020.

However, despite the company’s excellent performance the last 18 months, the stock has only appreciated ~140% over the previous five-year period. 

While EBAY is somewhat differentiated from the vast majority of online retail platforms – it focuses on facilitating user-to-user transactions as opposed to merchant-to-user ones – some industry watchers have cast doubts about whether the business model can keep up with the growth rates that its rivals Amazon (AMZN) and Alibaba (BABA) have enjoyed of late.

There’s also a lingering worry that if the pandemic tailwinds that boosted EBAY’s Q1 revenues in May up to the $3 billion mark should recede, would the business have the ability to maintain that momentum in the future. 

But eBay (EBAY) is a past master at monetizing the user base that it does have; and, at its current market price, the stock looks cheap with a bullish valuation to boot.

EBAY: Repairing Its Cash Flow

EBAY has been in the process of divesting some of its less-important businesses the last couple of years.

In 2020, the company sold StubHub for $4.05 billion, and immediately repurchased its own shares to more or less match the proceeds it took from that deal.

Another non-core enterprise to be offloaded was eBay’s classifieds business, which it sold to the Norwegian outfit Adevinta, a specialist in online global classified ads.

This sale netted $2.5 billion in cash, and allowed EBAY to retain a 44% equity stake in the company, worth around $9.2 billion.

It doesn’t stop there, however. In June this year, eBay announced it would also sell off an 80% stake in its Korean business to South Korea’s largest retailer, e-mart, for a total of roughly $3 billion.

In addition, eBay also has the right to purchase up to 5% of Dutch payment platform company Adyen through the exercise of a number of warrants that it holds. The warrant is already worth $1 billion, rising $700 million from the time the company acquired it in 2018.

So, what does all this free cash suddenly floating around mean for the company?

Well, from comments made by Jamie Iannone, Chief Executive Officer of eBay, it’s likely that the “optionality” the cash provides the business will be used to create “significant value…for our shareholders”.

This will almost certainly mean share buybacks and possibly an increase in the dividend payout, both of which will benefit investors. EBAY already did this with the StubHub money, so it’s a sure bet it’ll happen again.

Source: Unsplash

Q2 Results

After returning to eBay in April 2020 and taking on the mantle of CEO, Jamie Iannone quickly began streamlining the user experience on the auction site’s platform.

Among the changes that Iannone implemented were the introduction of a digital wallet-like payments function, QR coding for quicker and easier pickups, image-based listings and an improved search tool.

These changes appeared to have an immediate impact. Net income, which had been dragging in 2018 and 2019, shot up over the course of the pandemic, shooting up 25% in 2020 as the lock-down and stay-at-home orders proved a positive catalyst for most online retailers at that time. This upswing continued into the first half of 2021, where revenue grew to $5.3 billion, up 28% compared to the same period in 2020.

Growth seemed to slow down in the second quarter of 2021, however, as top-line income only increased 14%, missing Wall Street forecasts by $170 million. At the same time though, bottom-line non-GAAP profits of $0.99 per share beat analyst expectations by $0.04.

That said, the miss in revenue can be entirely explained by the selling off of EBAY’s Korea operations. Original guidance for the second quarter had revenue at a target of ~$3 billion, where the Korea business was expected to account for ~$0.4 billion of that.

Taking that out of the equation, the revenue guidance should be readjusted to ~$2.6 billion. On that basis, eBay’s actual sales of $2.67 billion should be seen as a win, not a loss.

Does eBay’s Dividend Sweeten The Deal?

It’s something of a mixed bag when it comes to eBay’s dividend history, and it’s not clear whether there’s enough here to attract investors on this one point alone.

EBAY pays out a small annual dividend of $0.72 per share, which translates to a dividend yield at today’s prices of just 0.93%. However, the company’s low yield is also reflected in its low cash dividend payout ratio of only 19%.

This could mean that should the business decide to return cash to investors via a dividend increase in the future, there’s room to facilitate that on the balance sheet.

In fact, eBay returned a total of $1.6 billion to shareholders in the last quarter, $1.5 billion of which came about through share repurchases, and a further $121 million paid in cash dividends. EBAY last increased its annual dividend payout by $0.02, giving it a payout growth rate of 2.8%.

If the company maintains this kind of generosity, it would result in a 5-year compounded dividend growth rate for investors of 15% – which is not too bad at all.

Valuation: Is EBAY Stock A Buy?

At the moment, based on present-day analyst estimates, EBAY is trading at a forward non-GAAP price to earnings ratio of 20x. However, this multiple is slated to come down to just 14x by 2023, suggesting that the company will improve its valuation over time.

Throw in the fact that it’s also expected to grow earnings per share by 13%, and you have a stock that’s likely to improve both top- and bottom-line numbers in the future.

Sure, eBay’s user growth isn’t growing at headline-making rates: in fact, its total active buyers actually dropped year-on-year, from 161 million in Q2’20 to just 159 million in Q2’21. But considering that EBAY still managed to improve revenue by 14% on a like-to-like basis, this shows the business is monetizing its base just fine.

The company is cash-rich right now, and already embarking on a massive $5.7 billion share buyback program which will see its share price ripen over the coming quarters.

With its niche in the market as an alternative, if not a rival, to the likes of Shopify (SHOP) and Etsy (ETSY), eBay has great growth prospects and an attractive valuation, making this stock a certain buy at current prices.

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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.