How Do Sales & Administrative Costs Impact eBay’s Income?

-10.74%
Downside
51.35
Market
45.84
Trefis
EBAY: eBay logo
EBAY
eBay

Sales, marketing and administrative expenses are major operating costs for eBay (NASDAQ:EBAY), accounting for close to 40% of its total operating expenses in 2015. Considering eBay has to compete against behemoth Amazon (NASDAQ:AMZN) in the e-commerce space, its marketing costs were expected to increase but its top line growth has not been commensurate with the increasing investments and advertisements. We see below that eBay’s sales, marketing, general and administrative costs as a percentage of revenues increased an average of 1.4 percentage points per year from 2013 to 2015. However, its operating margin declined at an average of about 2.1 percentage points per year from 29.7% in 2013 to 25.6% in 2015. ebay-38
Considering how eBay’s sales, marketing, general and administrative costs impact its operating margins, it is important to understand whether eBay is moving towards operational efficiency in light of the rising dominance of Amazon. In the first quarter this year, eBay’s operating margin improved 310 basis points over the prior year quarter, owing to a 4.9% decline in sales, marketing, general and administrative costs as a percentage of revenues. ebay-40

This in fact is the silver lining in eBay’s dismal sales performance in the first quarter this year. Compared to Amazon’s solid over 15% year-over-year growth in the first three months, eBay’s same-store-sales actually declined over the prior year month in March 2016. ebay-41

In our valuation for eBay based on the discounted cash flow methodology, we expect eBay’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) margin to improve at an average of 20 basis points every year over the next five years. If eBay’s EBITDA margin improves more than our estimate to reach 42% by the end of our forecast period, it presents an upside opportunity of 10% to the company’s stock. However, if eBay’s EBITDA margin declines in the face of rising competition to reach 33% by the end of our forecast period, it presents a downside of 10% to the company’s stock.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for eBay

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