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Morningstar | Marketplace Enhancements and Portfolio Moves Offer Catalysts but eBay's Long-Term Outlook Muted

We see three key investor takeaways from eBay's second-quarter update: 1) An improved marketplace experience and new services such as first-party advertising and payment intermediation are having a positive effect on revenue trends despite headwinds such as sales tax collection in the United States and weaker United Kingdom macro trends; 2) The company has begun to shed noncore marketplaces and appears open to selling StubHub and eBay Classifieds, moves that could unlock value in our opinion; and 3) Management acknowledged that its longer-term sustainable growth rate is somewhere above retail but below e-commerce, implying mid- to high-single-digit growth.

On the surface, these takeaways appear to be mixed messages, but they are consistent with our long-term assumptions calling for mid-single-digit revenue growth and adjusted operating margins peaking at about 30%. We see eBay further entrenching itself as a leading C2C platform--and sustaining its narrow moat--through data-driven search capabilities, simplified seller tools and pricing, advertising (which is on track for $700 million revenue in 2019 and could be a multibillion revenue opportunity longer-term, ahead of initial goals of $1 billion), and payments (which saw a 40% increase in seller adoption quarter over quarter and also represents a multibillion revenue opportunity at scale). However, with Amazon seeing strong buy-in from small sellers during the 2019 prime day event, we expect most sellers to pursue multichannel e-commerce strategies and limiting eBay's future revenue growth to the mid-single-digits.

We're planning a modest increase to our $36 fair value estimate because of greater visibility over advertising/payments and sales and marketing expense leverage, but see eBay as fairly valued on a standalone basis. However, we also see the potential for a few dollars per share of value creation through the sale of StubHub and Classifieds, and offering upside from the current market valuation.

EBay's third-quarter outlook--$2.61 billion-$2.66 billion in revenue (representing reported revenue growth between minus 1% and 1%, and 1% to 3% on a currency-adjusted basis) and adjusted EPS of $0.62-$0.65--strikes us as realistic with only minimal downside risk. The company's updated full-year guidance--$10.75 billion-$10.83 billion (down from $10.83 billion-$10.93 billion because of foreign currency translation as well as the sale of German flash-sale site brands4firends and representing 2%-3% growth on a currency-adjusted basis), adjusted operating margins of 28%-29% (reaffirmed), adjusted EPS of $2.70-$2.75 (up from $2.64-$2.70) has a bit more variability potential based on global macroeconomic trends. However, we ultimately believe these targets are achievable when factoring in positive customer acquisition trends (active buyer growth remained consistent at 4% and is now 182 million globally), advertising (promoted listing growth was in the triple-digits during the quarter) and payment intermediation momentum, sales & marketing expense leverage (sales and marketing expense was down 130 basis points year over year, and helped to drive a 170-basis point increase in adjusted operating margins to 26.9%), and share repurchase activity.