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eBay shares: what’s the investment case?

eBay was once a sweetheart of the dot-com era. But today, it barely features in conversations about the future of ecommerce, partly because everyone is too busy discussing its larger, faster growing rival Amazon.

eBay: is it slow to adapt or a more focused company?

Amazon has become the dominate force of ecommerce, but it has diversified into everything from cloud computing to selling groceries out of physical stores. In fact, the company has moved down so many other avenues that Amazon makes less than 30% of its operating profit from its ecommerce platform, even if it still generates the majority of revenue. Meanwhile, the drivers of eBay's business have remained largely unchanged for over a decade.

eBay’s main income comes from skimming transaction fees from its Marketplace platform that brings buyers and sellers together, accounting for 69% of total revenue. Another 10% comes from the fees it collects from StubHub, the event ticket Marketplace site it bought back in 2007. The remainder of revenue is broadly split between advertising on its core platform and on its variety of Classifieds brands that let people buy and sell goods within their local community, including Gumtree in the UK, in Germany and Kijiji in Canada.

eBay stock: there’s a strong investment case when you isolate the stock…

There is plenty to be upbeat about when you look at eBay on its own. The company has delivered reliable and constant growth in terms of sales and its user base, which currently stands at 180 million. Its simpler, lower risk approach to ecommerce means it boasts superior margins compared to other ecommerce companies. Net debt is low and cashflow is increasing, enough so that eBay began paying quarterly dividends this year and has vowed to continue repurchasing shares, with $5.7 billion left to be returned.

All in all, many would be envious of the position eBay is in after more than 20 years of graft. It is the second largest ecommerce player in the US, playing second fiddle only to Amazon with sales and customer numbers that comfortably outstrip major retailers like Target or Nordstrom. But eBay is a truly international business, active in 25 countries and generating just under 60% of its net revenue from outside the US.

eBay geographical net revenue breakdown eBay geographical net revenue breakdown

2016 2017 2018
US 43% 42% 41%
Germany 15% 15% 15%
UK 14% 14% 14%
South Korea 10% 11% 11%
Rest of the world 18% 19% 20%

… But it has underperformed when you compare it to the wider market

While the top ten US ecommerce firms are mostly delivering strong double digit rates of annual sales growth, eBay’s has been meagre in comparison. Growth has slowed across the industry but at just 2% last year, eBay has practically reached a standstill considering Amazon’s sales grew 20% and Walmart saw a 33% jump.

This has, unsurprisingly, seen eBay lose market share and its second place position weakened. In fact, eBay’s market share was 4.3% higher than third place Walmart in 2017 but that gap has closed significantly and today stands at just 1.5%. That means smaller rivals are catching up – and fast – while Amazon continues to pull ahead as the runaway leader, accounting for almost half of all US ecommerce sales.

US ecommerce sales growth Share of US ecommerce sales
2017 2018 2019 2017 2018 2019
Amazon 28.9% 23.1% 20.4% 42.0% 44.8% 47.0%
eBay 5.8% 3.4% 2.0% 7.6% 6.8% 6.1%
Walmart 47.2% 39.3% 32.7% 3.3% 4.0% 4.6%
Apple 35.9% 16.3% 15.1% 3.8% 3.8% 3.8%
Home Depot 22.0% 26.3% 23.0% 1.4% 1.6% 1.7%
Best Buy 21.8% 12.2% 13.9% 1.3% 1.3% 1.3%
Macy's 14.1% 13.3% 12.7% 1.3% 1.3% 1.2%
Qurate Retail Group 7.1% 89.7% 16.1% 0.8% 1.2% 1.3%
Costco 26.3% 31.3% 28.4% 1.0% 1.1% 1.3%
Wayfair 36.1% 41.4% 33.3% 0.9% 1.1% 1.3%

(Source: eMarketer. Annual sales growth figures correct as of Feb 2019. Market share taken in May 2019)

eBay vs Amazon: direct competitors, but two different breeds of business

Amazon and eBay directly compete with one another through their respective Marketplace-platforms, but they are two very different businesses. Firstly, although eBay is just one year older than its counterpart, Amazon has a runaway lead when it comes down to the financials. Amazon’s ecommerce business earns a much lower margin than eBay’s, but Amazon has still managed to grow profit at a much faster rate due to the exponential top-line expansion it has delivered over the years.

eBay’s revenue and gross profitability has continued to improve but the annual lifts being delivered are underwhelming considering the growth seen elsewhere in the market. Plus, the need to restructure, develop new products and tools, and boost its marketing efforts means eBay’s bottom-line has only managed to nudge slightly higher over the last five years, while Amazon has managed to turn from a $111 million pre-tax loss in 2014 to a bumper profit of over $12.4 billion in 2018, with revenue doubling over the same period.

eBay Key Financials ($, million)

2014 2015 2016 2017 2018 5 year growth
Net revenue 8,790 8,592 9,298 9,927 10,746 22.3%
Gross profit 7,127 6,821 7,294 7,706 8,364 17.4%
Operating profit 2,476 2,197 2,325 2,264 2,222 -10.3%
Pre-tax profit (continuing) 2,515 2,406 3,651 2,275 2,718 8.1%
Diluted EPS ($) -0.69 1.6 6.37 -0.95 2.55 -

Amazon Key Financials ($, million)

2014 2015 2016 2017 2018 5 year growth
Net product revenue 70,080 79,268 94,655 118,573 141,915 102.5%
Net services revenue 18,908 27,738 41,322 59,293 90,972 381.1%
Gross profit 26,236 35,355 47,722 65,932 93,000 254.5%
Operating profit 178 2,233 4,186 4,106 12,421 6878%
Pre-tax profit -111 1,568 3,892 3,806 11,261 -
Diluted EPS ($)- (0.52) 1.25 4.9 6.15 20.14 -

The story remains largely unchanged in the early part of 2019, with Amazon’s growth obliterating eBay’s on every level during the first quarter (Q1) of the year. Although eBay’s growth is reliable and consistent, shareholders regard it as paltry once they start to consider alternative investments.

Q1 2019 Results

eBay YoY % Growth Amazon YoY % Growth
Net revenue 2,643 2.4% 59,700 17.0%
Gross profit 2,042 1.0% 25,780 24.7%
Operating profit 609 5.2% 4,420 129.4%
Pre-tax profit 673 23.0% 4,401 129.7%
Diluted EPS ($) 0.57 42.5% 7.09 116.8%

eBay share price rises after Q1 results beat estimates

Their respective marketplaces are also different. While Amazon is still increasing the number of third party sellers active on its site, the company is also increasing the amount of own brand products it produces and sells – indeed, devices like the Amazon Echo smart speaker and Fire TV sticks are among the best selling products on the site. This means Amazon facilitates trade between external buyers and sellers while simultaneously competing head on with them by selling (and giving priority to) its own products. eBay, on the other hand, is solely a digital platform that connects third parties: it does not produce or sell its own products and is not a retailer like Amazon – a point it likes to make often to try to stand apart from the market leader. eBay also has significantly greater global reach, active in 25 countries whereas Amazon is present in just 13.

One of the reasons eBay has had to up its marketing efforts is to address the misconception that the company predominantly sells used goods, a result of its legacy after starting life as an auction site where people would bid against one another. Today though, over 80% of all the goods sold on eBay are new, and most are sold for fixed prices much like they are on Amazon.

Buyers tend to purchase the same products from each platform, albeit if some are more popular on one than the other. Both sell large amounts of electronic gadgets and health & beauty products. Amazon performs better in areas like books, having originally began life as an online bookstore, while eBay is particularly strong in clothing, automotive and jewellery.

eBay Top Selling Product Categories % of total items sold Amazon Top Selling Product Categories % of total items sold
Electronics and accessories 16.40% Books 15.90%
Clothing and accessories 13.80% Health and beauty 11.50%
Automotive 10.50% Electronics and accessories 10.80%
Health and beauty 8.80% Home and kitchen 10.50%
Sports and outdoors 7% Software and mobile apps 6.90%
Tools and home 6.30% Clothing and accessories 6.30%
Home and kitchen 6.30% Tools and home 6.10%
Toys and games 4.80% Sports and outdoors 4.40%
Jewellery 4.50% Movies and TV 3.50%
Books 4.30% Toys and games 3.40%
Shoes 2.80% Grocery and gourmet food 3.20%
Flowers and gifts 2.80% Office products 2.90%
Software and mobile apps 2.10% Pet supplies 2.80%

(Source: Edison Trends. During the 12 months to 31 January 2019)

Also, most third party sellers operate on both sites as well as others, suggesting they are tapping into the advantages and audiences of different marketplaces to maximise their sales. In the US, more than half of Amazon’s sellers also sell on eBay, with a similar amount also targeting customers through their own personal websites. Only 13% solely use Amazon, suggesting the majority of sellers don’t consider Amazon as the all-in-one marketplace that it wants to be.

Where else do US Amazon Marketplace users sell their products?
eBay 56%
Personal website 47%
Walmart 35%
Physical stores 23%
Shopify 19% 14%
Sears 8% 7%
Rakuten 5%
AliExpress 1%
Other 13%
None 13%

(Source: eMarketer, April 2019)

For sellers, Amazon’s Marketplace boasts a few major advantages over eBay’s. The company’s website is harmonised in the sense that buyers often think they are buying from Amazon rather than a third party, partly because Amazon often stores and ships the products to you on the seller’s behalf. It also has more loyal buyers to offer because of its Prime subscription service. Amazon’s founder, Jeff Bezos, has previously said fulfilment and Prime were two of the company’s biggest advantages over other ecommerce marketplaces like eBay.

ebay’s primary message to sellers, particularly those deliberating whether eBay or Amazon is the site to sell on, is that, unlike its rival, it doesn’t try to compete with its own products. Also, while Amazon does a good job to bring everyone’s products under one banner, eBay gives more freedom to sellers to attract their own business. While marketing on Amazon largely comes down to sponsored ads and paying your way up the top results, eBay sellers have much more freedom about how their products and online storefront are displayed to buyers. It is also far easier and quicker to sign-up and get started on eBay than it is on Amazon.

All of this culminates into an argument that Amazon is gradually becoming the marketplace for larger, more professional businesses while eBay is becoming favoured by smaller or individual sellers, particularly ones selling niche products or collectibles. Big names like Nike have almost been forced to sell on Amazon: it was the top selling clothing brand being sold on the site, but it was unauthorised third party sellers banking the profit rather than Nike itself, prompting it into action. Plus, in addition to competing against Amazon’s own products they must also handle the huge amount of new competition (the company does not release the number of third party sellers it has, but optimistic reports suggest up to 100,000 new sellers sign-up every month while more pessimistic forecasts suggest the figure to be closer to 300,000 a year). Some argue this makes Amazon more competitive for sellers and that eBay could be the better option for small businesses that don’t have the resources to take on big business.

The world doesn’t need an almost-as-good Amazon. They need a better eBay

As hard as it is not to compare eBay with Amazon, the company is adamant investors shouldn’t. In an interview with recode in 2016, eBay’s chief executive Devin Wenig, who took over in 2015 after eBay spun out payments processor PayPal, said he didn’t agree with the view that the company needs to be like Amazon and summed up why he viewed the businesses differently in one succinct sentence: 'I'd rather have a billion unique items that arrive in three days than a billion commodity items that arrive in an hour.'

Although eBay has been criticised for not diving into fast growing areas like many of its rivals, it is clear that eBay is reluctant to enter the high-growth, low-margin businesses that Amazon has pounced on, like groceries and selling more everyday items (like detergent). Instead, eBay focuses on its strengths, including its loyal customer base, global reach and its low-risk, asset-light business model. It wants to improve its site and the assistance it provides to sellers while building new revenue streams in higher margin areas where it is already a proven expert, such as with its new payments business as it pivots away from relying on PayPal. However, that argument is weakened by the fact Amazon makes most of its money from its cloud computing division that delivers very high margins.

eBay’s underperformance spurs activist investor to take action

Some shareholder’s frustration has boiled over. Elliot Management, the notorious activist investor that has sought change at multiple big name stocks such as Bayer and SAP, has a 4% stake in the business and has pushed for change by leading a small group of disgruntled investors.

Elliott, upon releasing a five point plan to revive growth at eBay, was blunt with its criticism of the business, stating it had hugely underperformed the market for years at a time when nearly everyone in the online retailing space is experiencing strong growth. It seems to have been tentatively successful after eBay reached out an olive branch and began 'constructive dialogue' with Elliott and others. Plus, Elliott and a representative from another firm, Marvell Technology, have been appointed to the board of eBay, with a third independent director to be added shortly.

eBay shares rise after Elliott Investments buys $1.4 billion stake

Although eBay has decided to listen rather than rebuke the calls for change, there is no guarantee the business will give in to Elliott’s demands, which, if pursued, will change the company from top to toe. Elliott wants eBay to spin off StubHub and its Classifieds businesses to raise funds to reinvest in its core marketplace platform, and pay a higher dividend even though payouts were only initiated this year. eBay has launched a strategic review of the business to consider Elliott’s suggestions – or at least seem to be – and is expected to report back on its decision on how to take the business forward sometime in the fall of 2019.

The company has said there is no guarantee it will look to divest from its non-core businesses, but if it decides not to take Elliott’s recommendations on board then it will have to convince the rest of its shareholders that it knows what is best. At the bare minimum, the activist investors have broken onto the board and forced eBay to answer some tough questions. At the most, eBay could come into some serious cash if it offloads StubHub or its Classifieds ads, and shareholders could see dividend payments grow faster than expected. The company has already exited investments in rivals like Flipkart in India and Mercado Libre in Latin America, generating tidy sums for the business but also offloading its exposure to faster growing rivals operating in higher growth countries.

eBay share price outlook: where next?

It won’t be known what direction eBay will take until it releases the results of its review later this year. There are multiple possibilities: it could divest and either reinvest the sums, pay down debt or return it to shareholders. It could do the opposite and double down on areas where it is strongest, like in clothing and automotive. It recently agreed to buy UK site (which will join its Gumtree UK team). However, this would go against the advice of its unhappy shareholders.

There are two other bright spots that could generate better growth for eBay. The first is its new ‘managed payments’ platform that was launched late last year to gradually replace PayPal, which has remained a core service for eBay customers even after separation. The number of sellers using the new payments service was 20% higher in Q1 of 2019 than the final three months of 2018, but there is a long way to go: just $363 million worth of products have been sold through the system, saving 4300 or so sellers a combined $2.7 million since launch. The second is advertising which, although already a minor revenue generator, should become a bigger part of the business going forward.

The strategy for its core marketplace business is unlikely to change dramatically after the strategic review. It will continue to improve areas like personalisation and likely to remain a favoured hub for small businesses and individual sellers, as well as for those that have fallen out with Amazon. It has continued to expand its international footprint with the recent acquisition of Giosis, which has expanded the range of products it offers in Japan.

Although eBay has said it wants to sell more 'everyday items' like Amazon, its strengths will continue to lie in high valued and niche products such as luxury watches, cars, antiques and collectibles.

In the meantime, eBay looks set to continue delivering the underwhelming but reliable growth that shareholders have become accustom to. eBay shares closed down 25% in 2018 but have rebounded strongly this year – up over 40% since the start of 2019. This was primarily driven by better-than-expected Q1 results which prompted eBay to raise its guidance for the full year.

The company expects annual revenue to be between $10.83 billion to $10.93 billion in 2019, representing annual growth of just 0.8% to 1.8%. However, its operating margin is forecast to be 28% to 29%, higher than the 20% delivered last year. Earnings per share should be in the range of $2.64 to $2.70 versus $2.55 in 2018. Free cashflow is expected to increase to $2.1 billion to $2.3 billion from about $2.0 billion last year.

Conclusion: do eBay shares go in your shopping cart or the bin?

eBay has remained one of the biggest forces in global ecommerce over the last two decades. It is still one of the largest players in the world and the fact it has listened to disgruntled investors and initiated dividends (which Amazon is yet to do) on top of generous share buybacks gives investors plenty of reason to consider eBay as an investment.

However, while the business may still be growing it is underperforming the wider market. It may not want to take the risk, follow the herd and jump into new fast growing markets. Missing out on major opportunities is fine, but only if the core business is delivering: which, right now, it is not.

While early investors in eBay have seen returns that are not be sniffed at, eBay’s appeal has ultimately waned because it is no longer the rip-roaring growth stock it once was. Opinion is split and it all comes down to how you view eBay - as a formidable and growing ecommerce player that pays dividends, or as a company that, gulp, just simply isn’t Amazon.

How to buy and sell Amazon shares

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