Fundamental Analysis of eBay - EBAY

I’ve had my eye on eBay for a while but never found a good time to invest. After reading the news about the cyberstalking by a previous founder I decided to stop putting my analysis off!

ebay logo

What Has Changed With eBay?

If like me, you know the brand but haven’t invested you might have missed the latest news. A week ago eBay announced $750m of financing in unsecured notes with the primary purpose of paying off its 2021 notes and any other debt which is more expensive than this offer, before using the proceeds for general admin.

eBay also increased their forecasts for Q2 2020. Apparently, between April 29th and June 4th, eBay has seen “significantly better than expectations” and due to the “magnitude of this change,” they have increased estimates. With the current user activity already running at the higher end of the original estimates, and “all major verticals are accelerating significantly compared to previous quarters.” As COVID-19 lockdowns start to ease up and businesses are encouraged to reopen, eBay is seeing increased growth.

ebay growth
Source: eBay Investor Relations

While this sounds strong on the surface, the announcement also includes a mention of its marketing activities and increasing the spend. eBay is giving new sellers the chance to sell for free, has extended seller protection and incentives, and increased the amount of free fixed fee listings you can have. These activities were critical as shelter-in-place orders were issued, carrying these offers on could be seen as snapping up more marketing share while businesses are looking to reopen or it could be leaving money on the table.

The biggest news is the new CEO has joined and been in charge from April 27th, Jamie Iannone. He’s worked on digital products for Barnes & Noble, CEO of SamsClub and promoted to COO of Walmart. We have yet to know what changes his influence will bring.

How Do eBay’s Fundamentals Look?

With Q1 out and judged by the market, and recent announcements about future growth already digested, we are in the perfect spot to think about the facts and figures.

Source: Genuine Impact

On the surface, eBay looks to be an extremely solid long term investment. Financially sound, a little overpriced but we aren’t talking Tesla levels, and strong future growth (as per their Q2 estimate update.)

Let’s dive into the raw numbers to understand and highlight the strengths and weaknesses of eBay.

One of the biggest attractions for investors in the early days of eBay was PayPal, which then turned into a risk. These days eBay is moving to its managed payment solution, it’s a big step to vertically integrating and removing 3rd party risks.

Source: eBay Q1 2020 Presentation, MS&O = Marketing Services & Other Revenue

In terms of revenue, we are slowly decreasing. The trailing 12 months compared to the previous period is showing an increase but the quarterly trend is turning negative.

We are still looking at $10.5bn in revenue over 12 months. These numbers were even more impressive back in 2015, we were closer to $19bn back then. The revenue eBay brings is interesting, but what is impressive is the 76.78% gross margin with a punchy 16.54% profit margin.

That profit margin does have a consistency problem. As eBay buys and sells competitors and brands the profit swing. Taking a step back to previous annual profit margins we have 23.54% in 2018, -10.62% in 2017, and 80.92% in 2016. The wild inconsistency of their profit margin makes it harder to gauge if they are keeping their position as the market leader without anecdotal evidence.

I am also worried about the rising levels of debt to assets. Reported to be 88.83% last quarter, and increasing every year since 2016.

ebay debt
Source: Wallmine

Financially eBay seems very strong but they aren’t filling me with confidence this can last, not without ongoing heavy investment. Either that profit margin, which is already temperamental, is going to shrink or the debt will overtake us.

eBay also recently joined the dividend club, they have been paying out since 2019 and they have been aiming for quarterly payments. I wouldn’t get too excited, a 1.26% dividend yield is more of a drag on the share price than paying back to shareholders effectively.

Source: Google Finance

Looking at the value assessment we start strong with a price to earnings ratio of 7.93x which is below the S&P 500 average but not at Buffett lover levels of interest. At the end of Q4 2019, this was over 50x but it normally flows in the teens.

eBay has a price to book of 11.74x and a book to share ratio of 4.08x. This is attractive compared to some of the tech companies in the US but isn’t going to covert any deep value fans.

Source: Genuine Impact

Looking to the future the sell-side analysts are all shifting to a hold stance. eBay recently hit a nice peak and has started to smooth out again. Looking back historically we see a lot of V shapes and periods of low volatility.

Source: Wallmine

The future share price also reflects this meeker outlook of not much happening, and that low dividend isn’t doing much to hold my attention.

Summary Pros

  • History of strong finances
  • Involved in M&A activity to grow and expand internationally
  • Rolling out their payment solution for deeper vertical integration
  • Coming out of COVID-19 with strong traction

Summary Cons

  • Volatile profits and spending
  • Unproven CEO taking control
  • Debt is increasing with no sign of slowing
  • The second wave of COVID-19 would destroy increased estimates
  • Are they still disrupting or at risk of being disrupted

My Thoughts

eBay is a nice simple long term investment, if you are looking for a five year buy and hold there are worst things to do with your money. I don’t hold eBay and don’t plan on buying it. If I held eBay I would look to exit.

There isn’t the exciting growth I would expect from a company like eBay. There are more interesting or reliable places to put my money. As a business, they have turned into a slower-moving giant, and they don’t give me the impression they are doing enough to protect from disruption other than increasing marketing spend. The technology seems to be keeping pace with competitors but they aren’t passing anyone.

For me, eBay doesn’t give me the confidence it’s going to be a smooth upward trend for the next five years, and it doesn’t show signs of any radical innovation which would meaningfully move the needle. eBay might be a household name, but it’s not an investment that will live in my portfolio.

Let me know what you think, do you have a different view on eBay? Is there more to expect which I am missing? Or is my view too pessimistic?

Thanks for reading and stay safe.