eBay: 2016 In Review
eBay‘s (NASDAQ:EBAY) stock is up 8% year-to-date following strong second and third quarter results, partially offset by weak fourth quarter guidance. In the first nine months of the year, eBay’s top line grew 5% year-over-year (y-o-y) to about $6.6 billion, driven by strong growth in StubHub and marketing and advertising revenue. Driven by a 25% decline in general and administrative costs, the company’s operating income grew 10% to about $1.7 billion in the first nine months.
Devin N. Wenig, eBay’s President and CEO, stated earlier this year that the company’s strategy was to maintain a low-to-mid single digit top-line growth rate and keep margins and cash flows high. eBay has been able to achieve this target so far, with its operating margin up 110 basis points and free cash flow up 42% to $1.7 billion over the same period last year.
eBay Opens A High End Furniture Shop
Looking to become a marketplace for unique curated inventory, eBay in October launched “eBay collective” — an elevated shopping experience to provide interior designers and consumers with curated inventory of furniture, antiques, contemporary design and fine art. Aimed at attracting consumers who are looking for unique pieces of furniture or a one-of-a-kind piece of art, this platform has been designed to provide a higher-end shopping experience. The company has also integrated its “Shop The Look” artificial intelligence technology on this platform, which allows shoppers to scroll over an image to activate searches in the eBay Collective for matching inventory. Targeting high end shoppers with unique inventory and antiques can potentially increase the average spend per active user on eBay’s platform, which is a key driver of its valuation. We believe these initiatives to attract high end shoppers on its platform can drive profitability for eBay in the long term.
Average Spend Per Users Declining
Although the number of active users continue to rise for eBay, the average spend per user declined in 2016. Compared to an average spend per user of around $129 per quarter in 2015, the figure was $125 per user per quarter in the first nine months of 2016.
eBay’s Performance In India
While eBay had a first-mover advantage in India, it has started losing business to new entrants in the market primarily due to several operational issues faced by buyers and sellers. Complaints centered on counterfeit merchandise, delayed deliveries and refunds on returns, and the lack of a support system for sellers. eBay is currently working towards resolving these issues and making its platform better for both buyers and sellers. We believe this is a critical step before the company can create a competitive edge. Currently, the Indian e-commerce market is dominated by three players who command more than 90% share in this market — Flipkart, Snapdeal and Amazon. Furthermore, two product segments (electronics and appliances and fashion products) dominate nearly 80% of this market.
Full Year & Q4 Guidance
In full year 2016, eBay expects its revenues to grow 4-5% y-o-y to $8.95-$9.0 billion. We expect the company to achieve this target, driven by 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. However, competition from retailing giants Amazon (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT) in the domestic market could limit eBay’s chances of beating its conservative sales growth target. (Also read: Is eBay Losing Its U.S. E-Commerce Footing To Walmart?)
In the fourth quarter, the company expects revenue between $2.36 billion and $2.41 billion, against consensus estimates of $2.40 billion. It also expects non-GAAP EPS of $0.52 to $0.54 per share, against consensus estimates of $0.54.
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