eBay’s Margins Could Remain Under Pressure Even As StubHub Sales Pick Up

by Trefis Team
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eBay (NASDAQ:EBAY) is scheduled to report its third quarter results on Wednesday, October 18. In recent quarters, the company has reported steady mid-single digit revenue growth mainly driven by StubHub, the online ticketing business. However, Q2 was a relatively mixed quarter for StubHub owing to a weaker event landscape and tough competition in the market. Consequently, much of the growth in the most recent quarter was attributable to a strong quarter for eBay’s marketplaces business

We have a $33 price estimate for eBay, which is more than 10% lower than the current market price. eBay’s stock price has fluctuated between $28 and $37 in the last year.

See our complete analysis for eBay

Q3 2017 and Full Year 2017 Guidance

In the third quarter this year, eBay expects revenue of just under $2.4 billion, representing 6-8% annual growth. It also expects non-GAAP EPS of $0.46 to $0.48 per share, which is in line with consensus estimates. Similarly, eBay expects full year non-GAAP diluted EPS of around $1.70, lower than the consensus estimates of around $2.00 per share.

Key Trends

In recent quarters, eBay’s online ticketing business has largely driven top line growth for the company. This has been the fastest growing revenue stream for the company of late, with double digit revenue growth in each of the previous eight quarters before the June quarter this year. StubHub revenues were up 30% through 2016 to $937 million corresponding to a 30% increase in GMV last year. However, growth in StubHub revenues slowed in Q1 this year, which the company attributed to a weak event landscape. This is expected to be a short-term trend with second half revenues likely to bounce back.

Comparatively, its marketplace GMV has increased by low single digits in recent quarters. While the total number of active users on eBay has increased, the average spend per user has fallen. As a result, eBay’s marketplace revenues remained roughly flat over comparable prior year periods. In an attempt to boost sales in the marketplaces segment, eBay announced a price match guarantee scheme in the previous quarter. Under the conditions of this deal, buyers can look up identical products available on competitors’ websites such as Amazon (NASDAQ:AMZN), Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY) and a few others. Buyers can then inform eBay’s customer service representatives of the lower prices, and upon verification the company would issue a coupon for the difference. We forecast the average spend per active user for eBay to remain in the $500 range in the near term.

Despite revenue growth in recent quarters, eBay has been grappling with falling operating margins. An increase in marketing and product development costs has led to some margin compression. eBay’s adjusted EBITDA margin has consistently fallen from almost 50% in 2012 to just over 38% in 2016. In the most recent quarter, the company’s gross margin and operating profit margin each fell by around 2 percentage points. We forecast this figure to decline further, albeit at a slower pace, to around 37% through the end of our forecast period.

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