eBay’s Q4 Results As Expected, Stock Stumbles On Bleak Guidance

eBay‘s (NASDAQ:EBAY) fourth quarter financial results and metrics were largely in line with our expectations. The company reported modest 5% year-over-year (y-o-y) growth in active buyers to 162 million, with gross merchandise value almost flat at $21.9 billion. eBay’s Q4 top line was flat and met the Reuters’ compiled consensus estimate of $2.32 billion. For full year 2015, eBay’s total revenue declined by 2% y-o-y to $8.6 billion with $6.83 billion contributed by transaction revenues and $1.76 billion contributed by marketing services and other revenues. In terms of bottom line, eBay’s Q4 and full year 2015 earnings of 50 cents a share and $1.83 per share, respectively, were in line with Reuters’ compiled consensus estimates. ^[1]

Notwithstanding its expected fourth quarter results, eBay’s stock fell over 13% in after-hours trading because of its bleak guidance for Q1 and full year 2016. The company expects Q1 2016 earnings per share (EPS) of $0.43-$0.45 against a consensus estimate of $0.48, and full year 2016 EPS of $1.82-$1.87 against a consensus estimate of $1.98. Management attributed the 6-10% y-o-y decline in expected earnings to the stronger U.S. dollar and adverse impact of now-absent Paypal synergies. 

Devin N. Wenig, eBay’s President and CEO, stated during the earnings call that the company’s strategy was to maintain a low-to-mid single digit top line growth rate and keep margins and cash flow high. However, the company’s guidance estimates an operating margin of 31-33% in 2016 compared to 33.5% in full year 2015. In terms of cash flows, eBay expects to generate $2.2-$2.5 billion in free cash flows in full year 2016 compared to $2.2 billion generated in 2015.

eBay’s management also shed light on the progress of their recent initiatives, namely –  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 underperform the broader e-commerce market.

See our complete analysis for eBay

Strong U.S. Dollar Impacts GMV and Revenues

On a constant currency basis, eBay’s GMV (gross merchandise volume) and revenue both rose by 5% y-o-y. However, appreciation of the U.S. dollar significantly impacted results and overall reported revenue was flat at $2.32 billion. The active buyer growth of 5% y-o-y in Q4 2015 was in line with the growth experienced in Q3 but was lower than that witnessed in Q2 (6%) and Q1 (8%). This can be attributed to the traffic-related challenges faced by the company from last year’s Google Panda update and the security breach issue.

In terms of geographical distribution, U.S. GMV grew by 4% y-o-y to $9 billion driven by strong growth in the StubHub business, and the international market delivered $13 billion, growing at 6% y-o-y. Over the near-term, we expect eBay’s top line growth to range between 3% and 5% on a constant currency basis owing to various traffic-related challenges.

Updates On Recent Initiatives

SEO Changes: eBay’s efforts to structure its data and organize products into catalogs are showing progress. By the end of December 2015, around 37% of relevant listings have been covered by this update compared to 28% by the end of September 2015. The company expects to cover up to 60% of listings by the end of February 2016. Going forward, we expect these changes to help improve the conversion rate of products listed on eBay’s marketplaces and increase organic traffic from search engines.

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 tools for sellers. eBay has also expanded its intermediate selling service ‘eBay Valet’ to drive more sellers to its marketplaces. These appear to be steps in the right direction, as previous seller policies had created significant dissatisfaction among the seller community.

We are in the process of revising our $29 price estimate for eBay’s stock.

1. eBay Q4 2015 Results, January 28 2016 [↩]