EBay Inc. (EBAY, Financial), one of the leading e-commerce companies in the world in customer-to-customer and business-to-customer sales, reported better-than-expected financial results for the first quarter of 2021.
Even on the back of strong earnings, shares tumbled 7% on April 29 because of its poor guidance for the second quarter. The company believes it will see a decline in sales volume once the economy reopens as consumers are itching to go out and shop at brick-and-mortar stores, which has not been possible for the better part of the past 12 months as a result of the Covid-19 pandemic. Although there will be a change in consumer spending as travel restrictions are gradually lifted and businesses reopen, there are many reasons to believe that the e-commerce industry will continue to grow in the foreseeable future. As one of the leading players in this sector, eBay is well positioned to grow its earnings over the next few years and is very attractively valued.
First-quarter earnings recap and why the outlook is promising
The company reported earnings of $1.09 per share and revenue of $3.02 billion, which was a 41.8% increase from the year-ago quarter. The gross merchandise value was $27 billion and eBay generated free cash flow of $855 million, once again proving the cash-rich nature of its business model. EBay paid back its shareholders $414 million through share repurchases and cash dividends as well, staying true to its commitment to reward long-term shareholders.
The number of small and home-based businesses has risen globally over the last 12 months because of the pandemic-induced recession that resulted in job losses and the closure of an array of companies. Many of these new businesses were set up as online-only stores, which aided eBay's growth in the first quarter as well. Active sellers on the platform surpassed 20 million globally, an increase of 8%, and active buyers surpassed 187 million , a year-over-year increase of 7%. In the first quarter, the company reported advertising revenue of about $224 million with promoted listings, up 58%.
Exhibit 1: Gross merchandise value (USD millions)
Source: Investor presentation.
The company launched Terapeak Product Research for all seller hub users in several countries during the first quarter, which was a noteworthy development. Terapeak enables eBay merchants to research their respective competitors and provides insights as to how a seller can improve his listings to attract more buyers. Gaining access to the feature could be a game-changer for sellers as listing optimization and market research platforms usually charge hefty fees, but eBay offers the same services at no cost to most merchants. This, in return, is likely to attract many new high-scale sellers to the platform.
Commenting on the first-quarter performance, eBay CEO Jamie Iannone said:
"For our certified refurbished experience, eBay sellers continue to see strong velocity and we've expanded in the US to over 150 brands. We have also rolled certified refurbish out of the UK, Canada, and Germany with more than 100 top brands signed up already. Buyers love the low prices unlike new products as well as free shipping, extended warranties, and extended returns."
EBay is trying to boost the sales of luxury watches and sneakers as well, which could be another growth catalyst in the future. Luxury watch sales grew 38% year over year in the U.S. in the March quarter, and the customer satisfaction for these items hit an all-time high in 2021 according to data published by the company.
The company remains focused on building strong relationships with both new and existing sellers on the platform and is planning to further strengthen ties by prioritizing small business owners in the future. This strategy is likely to result in both customer and seller stickiness, which could lead to very lucrative competitive advantages in the future.
E-commerce industry outlook
According to data from Statista, global e-commerce sales will reach $4.9 trillion in 2021. The industry has been slowly taking over the global retail market and will account for 17.5% of global retail sales this year. In 2020, e-commerce penetration hit an all-time high of 16.4% of overall global retail sales as stores were forced to close due to mobility restrictions. This positive momentum is expected to last through the end of this year as well.
Exhibit 2: Retail e-commerce sales worldwide from 2014 to 2024 (USD billions)
Source: Statista.
According to a recent study by eMarketer, the growth rate of the industry will slow down considerably in all the major regions of the world in 2021, which is a reasonable expectation considering the unusually high growth rates seen last year. This, however, does not mean the industry will continue to grow at unattractive rates in the coming years. A record number of consumers experienced online shopping for the first time in their lives in 2020, and at least a small percentage of these users can be expected to stick with online shopping in the long run as a result of the high degree of convenience associated with purchasing goods and services online.
China is expected to be the largest market for the e-commerce industry this year, followed by the United States.
Exhibit 3: Top 10 countries ranked by expected retail e-commerce sales (2021)
Source: eMarketer.
The number of e-commerce buyers will continue to rise even after the economy rebounds from the recession as the global lockdown highlighted the importance of digital experiences in the lives of consumers. While consumer spending shifted to health, necessities and other essential products, the demand for easy and convenient shopping also increased. Brands that are focused on building and expanding their businesses around these changes in purchasing behavior are likely to be rewarded in the long run.
According to GlobalWebIndex data, 48.8% of survey respondents said they would continue to shop online even when it is safe to visit brick-and-mortar stores. Customer satisfaction is the most important growth pillar for e-commerce companies. For instance, a survey conducted in Finland shows that 73% of Finnish customers are likely to continue shopping online in the long run because of their satisfaction with the online purchasing experience. Free and same-day delivery has a strong impact on buying decisions as well, and companies have already identified this trend. People are also becoming more conscious buyers, meaning they are looking for products that are environmentally friendly and have zero-waste packaging. These trends will have a significant impact on the way e-commerce companies innovate, evolve and grow their brand value. In a research report, the World Business Council for Sustainable Development wrote:
"Consumers in rapidly developing and developed markets – particularly China, Australia, Sweden, and the US – report a propensity to buy from companies with a reputation for environmental and social responsibility and, in a study by the European Union, 75% of respondents agreed that they would pay more for environmentally friendly products."
The below illustration from this research report confirms that consumers are willing to even pay extra for environmentally friendly products.
Exhibit 4: Consumer preference characteristics
Takeaway
EBay is not only a leading player in the booming e-commerce industry, but also a leader in embracing sustainable solutions to promote environmentally friendly policies. The expected growth in earnings resulting from favorable macroeconomic conditions and the expected expansion in earnings multiples resulting from an improvement in investor sentiment toward companies promoting environmentally friendly policies should help eBay's stock hit new highs in the coming years.
Commenting on the company's first-quarter earnings and outlook, Morgan Stanley analysts wrote:
"eBay's 1Q results/2Q guide were largely in-line but with reopening uncertainties lingering, EBAY remains a show-me story. We see multiple initiatives they are investing in to drive structural growth, with execution key. Remain EW, $63PT. Our $79 bull case contemplates sum of parts/asset sales."
EBay appears to be fairly valued in the market, and value investors should find this an attractive opportunity considering the ludicrous valuation multiples associated with other tech companies.
Disclosure: The author owns eBay shares.
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