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Robert Stephens, CFA
Robert Stephens, CFA
Articles (195) 

eBay Has Growth Potential Due to Low Valuation

The company’s future prospects could excite investor sentiment

July 12, 2019 | About:

eBay (NASDAQ:EBAY)’s focus on improving the user experience could widen its economic moat. The online retailer is seeking to make it easier for buyers and sellers to use its platform in order to boost engagement levels.

The company’s financial prospects are set to be catalyzed by a full rollout of its intermediated payments in 2020 and a pivot to first-party advertisements.

The stock could deliver capital growth after matching the S&P 500’s 7% rise in the last year, with its valuation suggesting that it offers a margin of safety.

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Improving the user experience

eBay’s focus on improving the user experience could attract new customers and lead to greater loyalty. In the most recent quarter, it rolled out a simpler registration process that seeks to make it easier for a guest user to become a fully registered customer. This could lead to an increased number of registered users that provides the company with greater marketing opportunities.

The company’s rollout of eBay-guaranteed delivery continued in the most recent quarter. It now has 25% volume coverage in the U.S. It provides sellers with greater visibility in search results, while reducing delivery time for buyers. This could lead to improved satisfaction rates among buyers and sellers.

In addition, eBay sellers are being provided with updated and improved guidance to enhance their product aspect coverage. Not only is this improving the company’s catalog of products, it is leading to more accurate search results for customers, which is producing higher conversion rates.

New tools are being rolled out for eBay sellers that make it easier for them to manage their listings. For example, competitive pricing data is shown next to their listings, while recommendations on whether a listing would benefit from having additional promotion are becoming increasingly accurate. This has the potential to encourage a larger proportion of sellers to promote their listings, which produces incremental revenue for the company.

Growth opportunities

The company’s intermediated payments experience could catalyze its financial performance. It launched in the third quarter of the previous fiscal year, with the company managing the payment flow for 4,300 active sellers who have opted into the program. So far, those sellers have saved $2.7 million in payment-related costs, while the company is anticipating a $2 billion revenue opportunity following a full rollout of the program in 2020.

eBay’s decision to cease showing third-party ads is expected to enhance the user experience and produce higher levels of customer engagement. It also provides sellers with a greater opportunity to use promoted listings. In the most recent quarter, this produced a 110% rise in promoted listings revenue to $65 million. Over the long run, the company expects to generate over $1 billion per annum from first-party ads.

Threats

In the most recent quarter, the company reported a negative impact from the adoption of an internet sales tax in the U.S. and value-added tax in a number of international markets. Currently, there is no small business exemption from the tax, which is set to make it harder for small, domestic sellers to compete with large merchants. In the last quarter, eBay reported that the U.S. sales tax and international value-added tax each reduced gross merchandise volume by around 1 percentage point. It is expected to continue to be a headwind over the near term.

In response, eBay is seeking to become increasingly diversified in order to reduce overall risk. For example, it is preparing to launch intermediated payments in Germany. This is expected to be the first of many international markets where the company offers its payment solutions to sellers. It also expanded its motors vertical into Canada with the launch of Kijiji Autos in the last quarter. It will seek to implement the strategies employed in its Classified platform across new international markets in order to enhance its geographic spread at a faster pace.

Outlook

eBay's strategy to enhance the user experience could strengthen engagement levels and improve its competitive position versus the wider retail sector. Its opportunities to generate increasing revenue from advertising and intermediated payments in a variety of markets could enhance its financial performance.

eBay is expected to report a rise in earnings per share of 14% in the next fiscal year. Since it has a price-earnings ratio of 14, it seems to offer a margin of safety. Having performed in line with the S&P 500 over the last year, the stock offers investment appeal.

Disclosure: the author has no position in any stocks mentioned.

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