Morningstar | EBay Shifts Narrative to Margin Expansion via Advertising and Payments, but Growth Questions Linger
With the market bracing for the worst following cautious commentary from PayPal regarding eBay volume two weeks ago, eBay's third-quarter results still achieved management guidance (revenue of $2.65 billion and adjusted EPS of $0.56 versus an outlook of $2.64 billion-$2.69 billion and adjusted EPS of $0.54-$0.56). However, with U.S. marketplaces gross merchandise volume growth decelerating 2 points to 3%, several brand marketing efforts "not delivering a sufficient return," and a mixed outlook for 2019 (GMV and revenue growth in the low to mid-single digits, margin expansion despite investments in new growth initiatives, and low to mid-teens EPS growth), our stance is unchanged following the update. We believe eBay has a place in the broader e-commerce landscape through its improved C2C offerings and unique niches with the StubHub and classifieds platforms--the foundation of our narrow moat rating--but also faces headwinds from Amazon and others that have made their marketplaces more accommodating to small and medium sellers. While nascent growth avenues like first-party promoted listing advertising and payments are intriguing, their long-term success ultimately depends on buyer/seller growth and engagement. These efforts should be margin accretive over time--and support our 10-year adjusted operating margin outlook in the mid- to high 20s--but the long-term free cash flow benefit may be muted by investments needed to reinvigorate user growth beyond 2019.We plan to trim our $40 fair value estimate by 10% to account for the softer-than-anticipated 2019 outlook and tempered 2020-22 marketplace top-line assumptions, offset partly by reduced marketing and G&A expenses via new marketing approaches and head count reductions. While we view eBay as modestly undervalued and see its capital-allocation plan as attractive ($4.7 billion in share buybacks authorized), we currently see more attractive and dynamic investment stories in wide-moat Amazon and Alibaba.
eBay is a global commerce provider, which includes its Marketplace, StubHub and Classifieds platforms. The company's Marketplace platforms include its online marketplace located at www.ebay.com, its localized counterparts and the eBay suite of mobile apps. The company's StubHub platforms include its online ticket platform located at www.stubhub.com, its localized counterparts and the StubHub mobile apps. These platforms connect fans with their favorite sporting events, shows and artists and enable them to buy and sell tickets whenever and wherever they want. The company's Classifieds platforms include a collection of brands such as mobile.de, Kijiji, Gumtree, Marktplaats, eBay Kleinanzeigen and others.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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