In September, Deutsche Bank analyst Ross Sandler upgraded eBay Inc (NASDAQ:EBAY) stock, citing its low valuation and stellar growth prospects. EBay CTO Steve Fisher laid out the firm’s ambitious “replatforming” strategy in July. Sandler wrote that Expedia Inc (NYSE:EXPE) stock soared after a similar transformation in 2012. Then, on Oct. 20, eBay’s third-quarter earnings disappointed the market, wiping out months of gains.
Bearish investors see eBay as a value trap, another Yahoo! Inc. (NASDAQ:YHOO) in the making. At a time when the e-commerce sector grows at double-digit rates, EBAY finds itself growing revenues at a 4% to 6% annual rate. It also faces image problems: Millennials see it as outdated, a place mostly for selling antiques.
Well, what gives? Is eBay really evolving to keep up with competitors such as Amazon.com, Inc. (NASDAQ:AMZN), or is this all just window dressing?
EBay’s makeover shows promise, and the dip in EBAY stock appears to be a good buying opportunity. the company is doing three things to improve itself and could end up as a takeover target.
Innovating to Drive Sales Growth
EBAY is embracing emerging technologies to drive sales. In August, it rolled out its Seller Hub, giving sellers tools with which to manage inventory and match products to buyers.
In July, it acquired Israeli startup SalesPredict, further giving it information on buying behavior and helping sellers predict sales at certain prices.
EBAY stock is also using artificial intelligence to help it deliver a personalized shopping experience to users. This technology uses buyer data to match buyers to products relevant to their needs and preferences.
The company also increased cross-border sales through machine translation technology, breaking down the language barrier.
EBAY wants to get more visitors. With 165 million users in the third quarter of 2016, it still has room for growth. It’s looking at Facebook Inc (NASDAQ:FB) for users, launching its ShopBot personal assistant on Facebook Messenger. This will also help it gather more data on users. And it is working to rank its pages higher in search engines like Google.
Improving the Shopping Experience
EBAY is upgrading the user experience. To make logging in more convenient, it introduced the one-time password and Touch ID. Now users will not have to remember their password to sign in on mobile devices.
It launched a curated shop, eBay Collective, with specially selected art and furniture from the site’s dealers. Here eBay will show scenes from magazines such as Architectural Digest, and users can buy featured products on Collective. The company will put its image recognition technology to work here; it acquired the visual search engine Corrigon in early October. eBay Collective has displays of rooms where you can “shop the look” — hover over a vase or painting and it will show you similar-looking inventory.
Virtual reality shopping also promises to shake up retail. In May, EBAY stock and Myer, an Australian firm, rolled out the world’s first virtual reality department store. Users put on a headset and browse products using their eyes. This gives shoppers a personalized shopping experience; your very own department store. It also gives EBAY even more data to work with.
Carving out a Competitive Niche for EBAY Stock
Peter Thiel, the co-founder of Paypal Holdings Inc (NASDAQ:PYPL) and Palantir, once said that “competition is for losers.” This may be an overstatement, but there definitely is value in finding a niche. Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) compete, but they each define value differently and attract different customers. Walmart competes on price, getting buyers on a budget. Target partners with designers to sell trendy, quality products to younger and more affluent customers.
In cyberspace, eBay and Amazon will probably have a similar relationship. Amazon will be the Walmart of the internet, competing on cost and speed of delivery. Much like Target, EBAY stock is partnering with boutique sellers to bring unique items to its site.
It will emphasize unique products and a pleasant shopping experience to compete with Amazon. It also is working on its image, highlighting the brand as cool and chic. The recent eBay Unboxed ad campaign featured the fashion model Karlie Kloss and designer Nate Berkus.
The company also partners with brands and helps them sell their products online, somewhat like Alibaba Group Holding Ltd’s (NYSE:BABA) Tmall marketplace. Alibaba derives 90% of its revenue from within China, while EBAY gets 62% of its sales from outside the United States. EBAY’s greater international exposure gives it an advantage in bringing this business model to other countries.
Not holding inventory means that it doesn’t compete with brands, and also gives it a higher margin than AMZN.
Possible Takeover Target
EBAY’s attractive business model makes it a possible takeover target for a giant such as Facebook.
Facebook recently moved further towards e-commerce with Facebook Marketplace. People can buy or sell locally using Facebook groups; 450 million do so each month.
FB is growing its ecosystem, last year adding payments to Messenger, and users can also order food and book movie tickets on Facebook. FB stock appears to be turning into something like WeChat, the Chinese messenger app where users can pay bills, hail rides, make investments, shop and do other things. This will probably be necessary for Facebook to succeed in China. And it could help Facebook as well: the more time users spend on their app, the more ad revenue FB can generate.
Where does EBAY stock fit in with all this? Facebook could accelerate its move toward e-commerce by buying eBay. The two would fit well together. Facebook has scale and a user base (over a billion) that dwarfs eBay, but eBay has tools to personalize the shopping experience and expertise with e-commerce.
If Facebook shows no interest in buying EBAY, Alibaba might. Alibaba founder Jack Ma set a goal of generating 40% of BABA’s revenue from outside China in 10 years. Buying EBAY would make it easier for BABA to break into markets such as Britain and Germany, where eBay’s business thrives.
EBAY stock’s makeover will take time to pay off. In the meantime, it occupies a valuable piece of internet real estate trading at a low valuation relative to peers. Patient investors should buy in now; they may be richly rewarded later.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.
