Tough Road Ahead For eBay As It Battles Increased Competition

eBay (NASDAQ:EBAY), one of the leading players in the global e-commerce market, is expected to face a tough road ahead after the recent spin-off of its payments business. In our valuation model, we forecast the company to lose market share in the global B2C e-commerce market, which was valued at over $1.5 trillion in 2015, over our forecast horizon. This is as the company is seeing dramatic increase in competition, from both e-commerce giants such as Amazon and Alibaba, as well as from upcoming players such as Jet.com. Simultaneously, security breaches and Google Panda updates have significantly impacted traffic on eBay’s marketplaces over the recent past. While the new management is taking various measures to reinvigorate growth in the business, we believe the company will continue to under-perform the broader e-commerce market over the foreseeable future.

See our complete analysis for eBay

B2C E-Commerce Market Is Forecast To Grow At Over A 12% Rate During 2014-2018

The global business-to-consumer (B2C) e-commerce market is forecast to rise from $1,471 billion in 2014 to $2,356 billion in 2018, at a compound annual rate of around 12.5%, according to eMarketer estimates. ^[1] Though North America accounted for 32.9% share of the global market in 2014, its share is expected to drop to 30.6% by 2018. At the same time, the share of Asia-Pacific is forecast to increase from 31.2% in 2014 to 37.4% by 2018, according to eMarketer. North America, Asia-Pacific and Western Europe will continue to comprise the dominant share (around 90%) of the overall global e-commerce market over the coming years. For eBay, its international business accounted for 61% and 57% of the overall GMV and marketplaces net transaction revenues respectively in 2014. We believe this share will continue to rise in the coming years, in line with the strong growth being seen in e-commerce markets across international markets.

However, eBay’s Market Share Is Expected To Drop In The Coming Years

We forecast eBay’s market share in the global B2C e-commerce market to decline from 5.6% in 2014 to around 4% in 2018. Our view that the company could broadly under-perform the broader e-commerce market over the coming years, is based on the following factors:

1. Rapid Rise In Competition: Over the last few years, the competition has dramatically increased in the e-commerce market, with the entry of newer players, as well as aggressive steps being taken by brick and mortar giants such as Wal-Mart and Target. Globally, Amazon and Alibaba are expected to be the leading threats to eBay in the near-future. Amazon’s Prime program (which provides express and free shipping) and Alibaba’s ongoing expansion in international markets is hurting eBay’s growth in various markets. Also, the entry of newer players such as Jet.com — which recently emerged as the fourth largest player by GMV just a month after its launch — could further make things worse for eBay in the coming years. ^[2]
2. Security Issues Have Impacted eBay: The security issues that impacted eBay last year and as a result, required all users to change their passwords, still continue to somewhat impact spending on eBay’s marketplaces. Having millions of third-party sellers has created security issues for eBay in the past, and in the event, the company is not able to address these problems adequately, it could reduce trust among buyers on the company’s platforms.
3. Organic Traffic Has Dipped Recently On eBay: Managing search engine optimization (SEO) processes that govern the level of organic search traffic seen on eBay’s marketplaces has always been a complex task for eBay. This is as its hundreds of millions of seller-generated listings make quality-related issues difficult to manage. While the company is working on structured data catalogs to mitigate these issues, these measures will take a long time to execute given the manual nature of many of these processes. We believe satisfactorily resolving these issues for the long-term will be necessary to ensure healthy growth at eBay and hence, we’d continue to look for progress against these initiatives in the next few quarterly results.
4. Demographic Changes Have Weighed On Average Selling Prices (ASP): A mix shift towards rising proportion of international sellers, along with demographic change towards emerging markets and a younger audience have pulled down average selling prices on the eBay platform. At the same time, the company’s performance recently deteriorated in higher ASP geographies (such as the U.S.) which led to some market share decline in the recent past. We believe these trends could become even more prominent in the coming years.
5. Seller Policy Changes Will Be Important In The Coming Future: A number of seller policy changes had created significant dissatisfaction among eBay’s sellers over the past few years. However, with rapid increase in competition and the entry of newer marketplaces, eBay will have to keep its millions of sellers satisfied to ensure a healthy selection of products on it websites. We believe the recent measures being taken by the company management to improve their relations with the seller community represent steps in the right direction. In the unlikely event of these issues persisting, it could heavily impact growth on eBay’s marketplaces.

Our $31 price estimate for eBay’s stock, represents around 20% premium to the current market price. In the event, the company is able to retain its market share in the global e-retail market, it would represent over-25% upside to our current price estimate for the company’s stock.

1. Worldwide Ecommerce Sales to Increase Nearly 20% in 2014, eMarketer, July 23, 2014 [↩]
2. com: Taking Off, Full Throttle, ChannelAdvisor, September 11, 2015 [↩]