eBay’s Third Quarter Results Come In Better Than Expected, Driving Stock Higher

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eBay‘s (NASDAQ:EBAY) first stand-alone results (post PayPal separation) have somewhat exceeded our expectations, on both top-line and bottom-line. Despite increasing competition from Amazon and other brick-and-mortal retailers, the company’s growth remained stable during the third quarter. In addition, eBay raised its profitability outlook for the entire year. We are encouraged by the strategies being undertaken by the company’s management, including:  1) structuring data into catalogs (for search engine optimization); 2) diversifying traffic sources; 3) enhancing seller experience; and 4) trimming down the asset-portfolio.  We think these efforts will accelerate eBay’s growth and strengthen its demand over the long run. However, in the near-future, we think eBay could continue to under-perform the broader e-commerce market.

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Growth Remained Stable During The Third Quarter: In FX-neutral terms, eBay’s GMV (gross merchandise volume) and revenue rose by 6% and 5% respectively on a year-over-year basis. This came in line with the growth that was seen over the prior quarter. However, appreciation of the U.S. dollar significantly impacted results, as on a reported basis, overall revenue fell by 2%. The trailing 12-month active buyer growth slowed to 5% in Q3 as compared to 6% and 8% in Q2 and Q1 respectively, as the company continued to face traffic-related challenges from last year’s Google Panda update. In contrast, some progress was noted against the password-reset headwind, as some reduction in existing-buyer churn was noted during the third quarter.

In terms of geographical results — U.S. GMV growth accelerated by one point sequentially to 3% in Q3 2015driven by strong growth in the StubHub business. At the same time, international (currency-neutral) GMV growth slowed down by one point to 7% annually. Over the near-term, we expect eBay’s top-line increase (in FX-neutral terms) to range between 3% and 6%, as it continues to face various traffic-related challenges.

Progress Against Strategies Was Seen

SEO Changes: eBay’s efforts to structure its data and organize products into catalogs are showing progress.  To date, around 28% of relevant listings have been covered by this update. However, this process could take one to two years longer to fully complete. Longer-term, we expect these changes to help improve the conversion of products listed on eBay’s marketplaces, and increase organic traffic from search engines. Since this strategy is still in its early-stages, we do not expect any meaningful increase in search traffic over the fourth quarter.

Improving Seller Experience: Recently, eBay stepped up its efforts to improve the experience for sellers on its platform. The rating standards for sellers have been simplified by the new management. In addition, the company has created a new product called ‘Seller Hub’, which helps provide in-depth analytics and product management toos for sellers. eBay has also expanded its intermediate selling service ‘eBay Valet’ to drive more sellers to its marketplaces. We think these steps are in the right direction, as previous seller policies had created significant dissatisfaction among the seller community.

Costs Of Sales And G&A Drove Up Overall Expenses

eBay’s non-GAAP operating margin decreased by 90 basis points annually to 31.9% during the third quarter. This decrease was seen due to significant changes in certain expense items. Cost of revenue rose by 160 basis points, owing to currency impact and payment processing costs. General and administrative expenses increased by 120 basis points due to dis-synergies related to PayPal’s spin-off and appreciation of the U.S. dollar. Simultaneously, while sales and marketing expenses fell by 230 basis points year over year, this was largely driven by their shift to contra-revenue. [1] Nonetheless, the overall profitability decline came in lower than we previously anticipated.

We are in the process of revising our $31 price estimate for eBay’s stock.

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Notes:
  1. eBay (EBAY) Devin N. Wenig on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, October 21, 2015 []