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Morningstar | EBay Starts 2019 on Positive Note, but Long-Term Growth and Profitability Questions Linger

After a busy start to 2019 featuring changes to advertising strategies, new payment alternatives, and other restructuring efforts, the fundamental question remains: Can narrow-moat eBay ever be anything more than a mid-single-digit growth story?

There were some clear positives in its first-quarter update. Active buyers increased 4% year over year to 180 million (though up less than 1% on a sequential basis), which we attribute to platform changes designed to eliminate buyer friction and a reduction in lower-return marketing efforts. EBay's marketplace take rate (excluding StubHub) improved 80 basis points to 8.74%, which partly reflected first-party promoted listing advertising initiatives and helped to drive organic currency-neutral revenue growth of 3%. Sellers enrolled in eBay's payment intermediation platform grew 20% to 4,300, representing $220 million in gross merchandise volume intermediated and a reported 25% reduction in seller fees. Adjusted operating profits increased 190 basis points to 29.8% on reduced product development costs and more efficient marketing spending.

While its second-quarter ($2.64 billion-$2.69 billion in revenue, adjusted EPS of $0.61-$0.63) and updated full-year ($10.83 billion-$10.93 billion, up from $10.7 billion-$10.9 billion, adjusted operating margins of 28%-29%, adjusted EPS of $2.64-$2.70) guidance strikes us as realistic, we still struggle to come up with a blueprint returning eBay to sustainable high-single-digit growth and adjusted operating margins in the low 30s without improved seller technologies, reduced management and support costs, and changes to its asset portfolio. We don't plan a material change to our $36 fair value estimate, and while the stock offers a more compelling income story with $5.7 billion in share repurchases authorized and $500 million in annual dividends, we believe our longer-term assumptions (3%-4% revenue growth, adjusted operating margins peaking around 30%) are adequately priced in.