eBay Could See Continued Challenges In Third Quarter Earnings Results

eBay (NASDAQ:EBAY) is scheduled to report its financial results for the third quarter of 2015 on Wednesday, October 21st. This will represent the first earnings report from the company since its separation from the high-growth PayPal business. According to early indications from ChannelAdvisor, eBay’s sales highly under-performed the broader e-commerce market during the three months ended September 30, 2015, with average same store sales at around 3.4%. ((September 2015 ChannelAdvisor Same Store Sales (SSS) for eBay, Amazon, Google Shopping/PLA, CSE, Search and other e-commerce channels., ChannelAdvisor, October 8, 2015)) We believe this indicates continued challenges from last year’s security breach and Google Panda update, which have impacted traffic on the company’s marketplaces over the past several quarters. In addition, it could also be caused by increasing competition in the online retail sector, from both heavyweights such as Alibaba and Amazon, as well as newer companies in this market. We note that management is taking a slew of measures to reinvigorate growth within this business.  But we believe these steps could take a long time to show results, and hence forecast eBay’s problems to continue in the short-run.

See our complete analysis for eBay

Early Indications Of Same-Store Sales Look Weak

eBay’s same-store sales during the months of July, August and September 2015 came in at 5.8%, 3.4% and 1.1% respectively, according to data by ChannelAdvisor. ^[1] This indicates that eBay’s performance decelerated over the past few months and significantly under-performed the broader e-commerce growth rate of 15% (as per comScore). This also suggests that last year’s security breach and the Google Panda Update most likely continued to weigh on active buyer growth during the third quarter. Apart from the above, FX headwinds are also expected to be evident in eBay’s earnings during the quarterly results.

Measures Are Being Taken To Reinvigorate Growth, But Are Likely Take A Time

eBay’s management is taking a number of steps to accelerate growth, such as:

1. Structuring Product Listings Into Catalogs: eBay is taking these measures to structure data into a more user-friendly manner on its marketplaces. This also helps in improving the company’s ranking on search engines. Since this process requires manual efforts, we believe these measures could take a few more quarters to show results.
2. Focusing On Key Segments And Deal Categories: Rather than targeting the entire Internet audience, eBay wants to enhance its focus on certain key customer and deal segments in order to retain and grow its market share. We believe this strategy is essential as a number of competing websites have come up over the past few years, which are targeted on niche product categories.
3. Diversifying Traffic Sources: Facing traffic-related challenges from search engines, eBay is also trying to boost its traffic from social platforms, such as Facebook, Pinterest, Instagram, Snapchat.
4. Improving Seller-Experience: A number of seller policies had created significant dissatisfaction among the seller community over the past few years. However, the company has recently been working towards improving the situation. Lately, it made its rating system more friendlier for merchants and also provided data analytic capabilities to them.

While encouraging, these steps could take a long time to show results for eBay, in our view. We forecast the company to continue to under-perform the broader e-commerce market for the foreseeable future. This is based on the view that competition could continue to increase dramatically for eBay in the coming years, both from heavyweights such as Alibaba and Amazon, as well as traditional retailers looking to step up their play in the online retail space.

Our $31 price estimate for eBay’s stock, represents around 20% premium to the current market price.

1. August 2015 ChannelAdvisor Same Store Sales (SSS) for eBay, Amazon, Google Shopping/PLA, CSE, Search and other e-commerce channels, Channel Advisor, September 8, 2015 [↩]