Revising Our Outlook Lower After Ebay's Update
We are reducing our $44 fair value estimate and see the stock as modestly undervalued but would prefer a wider margin of safety.
EBay's (EBAY) second-quarter update was a continuation of recent trends, with management touting progress on several marketplace enhancements but also raising questions about the timing and efficacy of their impact. On the whole, we believe eBay is improving its profile amid a competitive e-commerce landscape, including guaranteed delivery and best-price matching, improved consumer-to-consumer mobile seller functionality, the shift to first-party promoted listings, payment intermediation, and eBay Plus membership launches in Germany/Australia, while also potentially bolstering shareholder return through the $1.1 billion in gross proceeds from the sale of its stake in Flipkart. Nevertheless, with active user growth decelerating to 3% year over year (after stripping out the acquisition of Giosis in Japan), sold items staying flat, marketing efforts that failed to "move the needle," and a weak second-half outlook for StubHub--all on top of an impressive early readthrough from Amazon's Prime Day event--the second-quarter update calls into question the appropriate long-term growth rate for eBay.
We still believe mid- to high-single digit GMV growth is the most realistic assumption over the next five years, below our low- to midteens growth forecast for the global e-commerce industry. Our outlook factors in Amazon's aggressive pursuit of small and midsize business sellers and many national retailers reaping benefits from new omnichannel strategies. We don't doubt that the measures eBay is taking will make its marketplace more competitive--particularly in C2C, which is the basis of our narrow moat rating--but customer acquisition and retention efforts may weigh on margins. As such, we plan a modest reduction in our medium-term revenue growth and margin assumptions, reducing our $44 fair value estimate by a few dollars. While we view eBay shares as modestly undervalued and see its capital allocation efforts as attractive, we'd prefer a wider margin of safety at current levels.
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R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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