Here Are Some Key Triggers For eBay’s Stock

-5.92%
Downside
51.92
Market
48.85
Trefis
EBAY: eBay logo
EBAY
eBay

eBay (NASDAQ:EBAY), one of the leading companies in the global e-commerce market, is presently trading at a market capitalization of around $35 billion with a P/E ratio of 11.7 (as compared to the industry average of 35.4, as per Morningstar). This is as eBay is battling increased competition and facing traffic-related headwinds, which lower its growth prospects. While our $29.34 price estimate for eBay’s stock is almost at par with the current market price, we think there are probable scenarios that could impact where it trades significantly over the coming years. More specifically, eBay’s performance relative to the broader e-commerce market could be governed by certain scenarios that could lead to huge swings in eBay’s stock in the coming years.

See our complete analysis for eBay

eBay’s Growth Accelerates Over Our Forecast Period (+30%)

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In our present valuation model, we estimate eBay’s transaction revenues to rise at 4.2% CAGR between 2014 and 2022 to over $9.6 billion. These represent conservative forecasts as we think eBay could continue to under-perform the broader e-commerce market over the coming years, owing to increased competition from heavyweights such as Amazon and Alibaba and entry of newer players in the e-commerce sector. Moreover, we expect headwinds (due to Google Panda update and security breach) to continue to weigh on eBay’s demand in the short-run.

However, under a scenario wherein eBay’s transaction revenues rise much faster at 8.2% CAGR over our review period, could lead to more than 30% rise in our price estimate to $39.50 (according to estimates using Trefis technology). We believe this scenario is possible, due to the following factors:  1) if eBay’s garners the benefits of its efforts to diversify traffic sources and to strengthen its search engine rankings by organizing data into catalogs;  2) if eBay improves the  seller experience so as to induce considerable growth in seller base, offering and product categories; and, 3) if new management is able to introduce innovative strategies that completely reverse the traffic decline caused by recent headwinds.

eBay’s Growth Worsens Over Our Forecast Period (-15%)

In contrast to the above upside scenario, another scenario is also plausible, wherein eBay’s transaction revenue growth falls to 2% CAGR over the 2014-2022 period. This scenario will take our price estimate around 15% lower to $24.80. We believe this scenario could occur, if the following takes place:  1) heavyweights such as Amazon and Alibaba, along with traditional brick-and mortar retail giants including Walmart and Target, continue to eat into eBay’s market share;2) the increased popularity of niche e-commerce websites (such as Etsy) result in lower demand on eBay’s marketplaces; and, 3) growth strategies being undertaken by new management fail to pay off.

Profitability Slips Over Our Forecast Period (-10%)

Although we forecast eBay’s EBITDA margin to decline in 2015 due to stand-up and dis-synergy costs caused by PayPal’s spin-off, we expect it  to stabilize at around 47% over our forecast period. This stems from our belief that eBay’s marketplaces business model will continue to deliver healthy margins, and its costs will see controlled growth over our review period.

However, in the event that eBay’s EBITDA margin falls to around 42% by the end of our forecast period, then this scenario will take our price estimate 10% lower to $26.50. We believe this scenario seems plausible as eBay could step up its investments in the coming years, to diversify its product offerings and fasten its delivery network. These additional investments (along with limited ability to raise prices due to increased competition) could put pressure on the bottom-line. Moreover if demand continues to slacken on eBay’s marketplaces, then increases in expenses could outpace growth in the top-line.

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