I do think that EBAY could be a multi-quarter turnaround story and that investors should watch closely when eBay reports earnings after the bell today.
I just have a hard time justifying getting off the sidelines until then.
How Did EBAY Do This Quarter?
There has been a lot of optimism regarding an EBAY stock turnaround in the market recently. EBAY stock is up about 15% year-to-date against the S&P 500 which is only up 5%. A big reason why is that eBay Inc. reported strong holiday sales in January 2017, despite increased competition from Amazon.com, Inc. (NASDAQ:AMZN).
It doesn’t look like the company had that great of Q1, though, and that could prove to be pretty bad news for EBAY stock. Search interest in eBay Inc continues to fall and is currently at multi-year lows. StubHub’s search interest was also unusually weak to start to 2017. Data from web traffic analytics site SimilarWeb is bullish for StubHub, but rather neutral for eBay.
Moreover, there is a clear downtrend in the use of EBAY by younger shoppers. According to Piper Jaffray’s Semi-Annual “Taking Stock With Teens” surveys, eBay Inc’s mind-share among teenage shoppers dropped from 5% in the fall of 2014 to 3% in the fall of 2016. That mindshare took another leg down to 2% in the recent spring 2017 survey.
The company also invested $500 million into Amazon’s big e-commerce rival in India, Flipkart. It is an interesting move, and a potentially big one as well. India’s e-commerce market is big and growing rapidly, so there is something to be said about being early to the party. But none of this will show up in eBay’s results this quarter.
All in all, the data doesn’t really support the notion that eBay Inc had a blowout quarter. StubHub looks to have continued its nice growth trajectory, albeit with some hiccups. EBay continued its slow growth, but also accelerated its loss of popularity among young shoppers. I don’t see anything that gets me particularly excited about EBAY stock in the short term.
Will eBay Follow in the Footsteps of Expedia?
Longer term, eBay Inc is much more interesting. Barclays thinks EBAY is the best internet value turnaround stock of 2017. Why? Well in part because they think EBAY stock is in the middle of a transition very similar to what Expedia Inc (NASDAQ:EXPE) went through from 2010 to 2012.
Much like eBay today, Expedia back then had an outdated system and website supporting its core business. Core room growth slipped to as low as 5% at the end of 2011, but then rebounded to 25% by the end of 2012 as Expedia’s website and system upgrades worked wonders.
Are there parallels to eBay? Well, the two are e-commerce focused marketplaces. In 2016, eBay is experiencing slowing, but still positive growth, much like Expedia in 2011. In 2017, eBay wants to revamp its platform like Expedia in 2012.
There is definitely a solid foundation to make the comparison, but it’s still early in the game for eBay. Many of its platform and delivery enhancements have yet to be enacted, so saying EBAY stock in 2017 will act like EXPE stock in 2012 is a little premature.
But there is hope for long-term growth, and for EBAY to generate significant alpha.
Bottom Line on EBAY stock
I’m not crazy about eBay heading into the first-quarter report. It lacks a visible catalyst, and how EBAY stock trades post-earnings will likely hinge on management commentary around improved shipping and platform upgrades. That’s a black box, and playing it seems like an unnecessarily gamble.
Over the long term, however, eBay’s valuation looks attractive due to its unique business model and ability to generate robust cash flows. Amazon is unequivocally eating market share, especially among younger consumers, but the e-commerce pie as a whole is growing rapidly.
EBay Inc doesn’t need to beat Amazon to support its current valuation. It simply needs to grow at a modest pace, and it looks like StubHub and Flipkart can keep top-line growth viable over the next several quarters.
This could be an Expedia-like turnaround, but if so, you won’t miss the boat by sitting on the sidelines for these earnings. I say investors can afford to wait and see when it comes to EBAY stock.
As of this writing, Luke Lango was long AMZN, and may initiate a long position in EBAY over the next 72 hours.