What Is The Future of eBay Stock?

Once a pillar of the eCommerce world, eBay (NASDAQ:EBAY) has spent the last several years in the shadows of players like Amazon, Etsy and Walmart.

Though far from the growth juggernaut that it once was, eBay is still quietly turning in solid performance and generating good earnings.

So what does the next decade hold for the original online auction site?

eBay’s Impressive Profitability

One of the first things investors are apt to notice when looking at eBay is its strong net margin. Over the trailing 12-month period, the company has generated net income of $2.77 billion on revenue of $10.11 billion, resulting in a net margin of 27.4%.

For reference, Amazon reported a net margin of 5.3% over the same period. Though Amazon is reinvesting more heavily into future growth initiatives, it’s worth noting that eBay’s robust profitability alone makes it worth a closer look.

Earnings continued to grow well last year. In 2022, the company had reported a net loss of $1.27 billion, making for a total gain of $4.05 billion year-over-year. Earnings for Q4 2023 alone were reported at $728 million, up 8% from the $671 million the company generated in the year-ago period.

On the downside, eBay’s revenue has not managed to continue advancing in the way Amazon’s has. Revenue grew by a very modest 2% last year.

While this positive growth is a good sign for the company’s future, eBay’s revenues peaked in the mid-2010s, declined thereafter and have since leveled off to a fairly stable range of about $10 billion annually.

This has somewhat blunted the company’s ability to fully capitalize on its now high net margins, as earnings could be substantially higher if eBay’s sales had more steam behind them.

eBay Is Aggressively Returning Cash to Shareholders

Another positive aspect of eBay is the fact that management appears very dedicated to using cash reserves to benefit shareholders directly. Principally, this has been accomplished via eBay’s $1.08 annual dividend. At current prices, this translates to a 2.1% yield.

Even more attractive is the dividend’s growth rate. Over the last five years, management has increased the distribution at a compounded annual rate of 48.8%. Even today, the company’s dividend payout ratio is only 20.7%, leaving the door open for many more dividend hikes.

In addition to prioritizing cash distributions, eBay has also launched an aggressive share buyback program. Alongside the release of FY2023 earnings, management announced a new buyback authorization for $2 billion.

Combined with the remainder of its last authorization, this gives eBay a green light to buy back a total of $3.4 billion of its own stock, representing over 10% of the company’s current market capitalization of about $27.0 billion.

Is eBay Fairly Valued?

The combination of strong profitability, dividend income potential and a robust share buyback program are all positive for investors looking at eBay.

The question, of course, is whether eBay shares are priced in a way that offers value. EBAY shares trade at 11.4x forward earnings and 2.7x sales, both of which are fairly low multiples.

The stock could, however, be overpriced to near-term growth, as the price-to-earnings-growth ratio of 1.7 is somewhat high.

This high valuation to growth may account for the moderately bearish outlook from analysts over the coming 12 months. eBay’s median target price of $48 per share implies a 6.5% drop from the current price level. Despite this, the stock holds a majority consensus of Hold, indicating a brighter long-term outlook.

What Is The Future of eBay Stock?

According to 26 analysts, the future of eBay stock is grim with downside potential of 6.5% to fair value of $48.66 per share.

The real question for eBay seems to be whether the company still has enough steam to continue growing. If so, its already high margins could make it an attractive choice for investors. If revenue continues to stagnate, however, investors could see lackluster returns.

Management maintains that it can successfully grow further, with Q1 revenues predicted to rise by 2%.

eBay’s growth strategy at this point focuses on its niche appeal to “enthusiast buyers,” or those who buy unique items generally not found on other platforms.

To this end, the company has begun creating AI-powered seller tools to help draw buyer attention to these items. The company is also attempting to make greater inroads in the social media world by creating tools for interactive shopping posts that sellers can share to platforms like Facebook and Instagram.

It’s also worth noting that eBay has emerged as a significant online auto parts seller. To enhance this business, which currently covers about 100 million user vehicles, eBay has introduced an AI predictive maintenance tool, which tracks maintenance schedules and makes suggestions based on make, model and year. If successful and well-received by consumers, the tool could drive growth in the eBay Motors segment of the business.

Cumulatively, eBay’s trajectory has led to a modestly positive growth outlook. Analysts predict that the company’s revenues will grow by about 2.7% next year, while earnings will rise a further 6.6%.

Over the coming five years, earnings growth is expected to average about 1.5% annually. This growth rate is small but may be high enough for investors viewing eBay primarily as a dividend investment.

Competitive Threats Loom Large

Despite good fundamentals, eBay carries meaningful competitive risks. eBay trails larger shopping platforms like Shopify and Amazon.

Though still a go-to for unique items, the company also faces competition from Etsy. Here, it’s worth noting that Etsy is still a much smaller platform than eBay, having generated a comparatively small $2.75 billion in revenue over the last year.

Without continued growth, investors also run the risk of overpaying for eBay. Although cost reductions could still send earnings higher, it will be difficult for the stock to deliver consistent compounding returns over time without a faster pace of revenue growth.

eBay’s net margins are at a high enough level that they likely can’t advance too much further. Once the company has maximized its margins, further revenue increases will become necessary.

Is eBay a Buy?

Although eBay has its risks, it’s difficult to ignore the solid profitability that the company has to offer.

If eBay can deliver moderate revenue growth while maintaining its margins and continuing to allocate cash to buybacks and dividends, the stock has a good chance of being a decent buy for conservative investors looking at shares that offer stability with some room for long-term upside.

This is especially true for those seeking dividend growth stocks, as eBay likely has considerable room to run in this area.

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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.