Will eBay’s Rebound Be Temporary?

eBay (NASDAQ:EBAY) stock lost more than 25% this year, declining from $36 to $26. Interestingly, it then spiked nearly 90%, from $26 to $49 (as of June 22, 2020). This means that it is now about 35% above where it started this year despite lockdown measures, decline in consumer spending, and increased unemployment resulting from the spread of Covid-19! Why? Of course the stock plummeted initially because eBay earns a commission on commerce transactions on its platform and with consumers seeming to prefer saving over spending, these transactions were expected to decline. But what happened later? As US stocks rallied with the expectation of the economy opening up, eBay benefited additionally because (1) Surprisingly, people were still buying off eBay as merchandise volumes grew in double digits even in April and May, and (2) eBay’s classified business is being viewed as a potential acquisition target. So far so good. But is this all? There is more to this story – eBay may be close to peaking in its rally. Trefis’ price estimate is $40, about 20% below the market price of $49 (as of June 22, 2020), based on two risk factors mentioned below. 

eBay Could Face Meaningful Revenue Decline As Its Peers See Growth

The first risk factor is the revenue decline in 2020. Sure eBay’s merchandise volumes were up at the beginning of the year, but the impact of a spending cut on volumes can be more visible in the second half. The merchandise mix can also change as discretionary spending is reduced, which can impact eBay’s GMV (gross merchandise value). Since eBay charges a transaction fee based on value of the goods sold through its platform, GMV becomes an important metric. In fact, in Q1 2020, eBay’s GMV was down 3.8%. The worst of the pandemic, especially in the U.S., was seen in Q2, and could extend to Q3. For the full year, we expect eBay’s revenue to decline from $10.8 billion in 2019 to $9.7 billion in 2020. Compared to this, we expect competitors such as Wal-Mart and Amazon to grow their revenue despite Covid-19 as they leverage their strong supply chains and efficiency to delivery what people can not come to the store to buy. eBay’s revenue was almost stagnant in 2019 itself, so it doesn’t really have the momentum of its peers to carry it through.

Not just Net Income, Net Margin % Can Also Fall

The second trigger is that not just the net income, but net margin could also decline because of the presence of fixed costs in eBay’s cost structure. eBay will still need to spend on sales and marketing, if it hopes to offset the impact of Covid-19. But there is no guarantee in terms of returns on that spending. In addition, product development is another expense where long-term development and on going maintenance work needs to be funded. Sure, eBay’s cost of merchandise will fall as revenues fall, but other than that, cost levers are not many. We expect net income to fall from $1.8 billion in 2019 to $1.5 billion in 2020, accompanied by a 700 bps fall in net margin.

So What Does This Mean For Share Price?

The combination of the above will imply 2020 EPS of $2.12 per share. How much should the market pay for each dollar of eBay’s earnings? As a reference, to earn close to $2.12 per year from a bank, you’d have to deposit about $200 in a savings account today, so about 90x the desired earnings. But eBay is a way riskier business. While e-commerce is generally growing, eBay hasn’t done as well as its competitors Amazon and Alibaba. Its growth is stagnating, and adverse economic conditions have hit it harder compared to Amazon – which continues to boom. Even before the pandemic hit, eBay was seeing a slowdown in new buyer activations and overall GMV growth. The crux is that we apply a fair P/E of 19 for eBay, slightly higher than previous years, but lower than that of competitors for a good reason. With EPS of $2.12 and a multiple of 19, we get a $40 price estimate for eBay. 

But eBay isn’t the only one that has seen a sharp stock rebound this year. Chipotle suffered a sharp drop in in-store transactions but quickly pivoted to deliveries to cover up the losses. Chipotle’s valuation in the market seems slightly cheap.  

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