Digital retail marketplace eBay Inc (NASDAQ:EBAY) was once considered the ugly duckling of e-commerce.
But that was long ago. Times have changed. The company has updated its website so that it looks more like an Internet commerce platform than an online garage sale. Operational results have consequently zoomed higher. Same with eBay stock — it has nearly doubled over the past two years.
But I don’t buy the hype in this run. Despite the current operational improvements, I don’t think things get much better for EBAY going forward. Competition in digital retail is only growing. And EBAY doesn’t offer much in the way of a competitive moat to ward off that competition.
Consequently, I think EBAY has reached the peak of its growth narrative. As for eBay stock, I think it’s overvalued here. It’s a low growth stock trading at a big growth multiple. The valuation will inevitably normalize once the hype dies down.
At that point, eBay stock could be due for some serious weakness.
Slow Growth Implies Bad Things for eBay Stock
My biggest problem with eBay stock is that this is a company immersed in the red-hot digital retail sector, but it’s growth rates say otherwise.
For all of 2016 and 2017, EBAY’s growth was largely stuck in neutral. Gross Merchandise Value (GMV) growth in the U.S. has been stuck between 3% and 8%. International GMV growth has been stuck between 6% and 9%. Total revenue growth has been stuck in the 6-8% range. Active buyer growth has been stuck around the 5% level.
Those really aren’t great growth rates for a digital commerce platform.
Amazon.com, Inc. (NASDAQ:AMZN) reported 38% revenue growth last quarter. Wayfair Inc (NYSE:W) reported revenue growth of 46% last quarter, as well as 33% active customer growth. Etsy Inc (NASDAQ:ETSY) reported GMV growth of 18% last quarter, alongside active buyer growth of 17%. JD.Com Inc(ADR) (NASDAQ:JD) reported revenue growth of 39% last quarter, with customer growth of 29%. Alibaba Group Holding Ltd (NYSE:BABA) reported 56% revenue growth last quarter. Walmart Inc (NYSE:WMT) reported digital sales growth of 23% last quarter. Target Corporation (NYSE:TGT) reported digital sales growth of 29% last quarter.
In other words, eBay’s sub-10% revenue growth rates and 5% user growth rates are really, really low for the digital commerce world.
Bulls will scream EBAY is large, so it shouldn’t grow that quickly. That is true. But Amazon, Alibaba, JD, Walmart and Target all take home more revenue than eBay.
So why isn’t growth at eBay more like the growth at Amazon, Alibaba, JD, Walmart and Target?
Competition for eBay Stock
Because while eBay is dominating a niche part of the digital retail world — a digital garage sale connecting buyers and sellers — there clearly isn’t much growth left in that niche. Plus, competition is coming in that niche from Facebook Inc (NASDAQ:FB) and others. As Facebook Marketplace grows in scale, EBAY’s growth rates should come down. As more and more social media companies use their data and large networks to also build out their own digital garage sales, eBay’s growth rates will come down even more.
Thus, EBAY is a slowing revenue growth story on already anemic revenue growth rates. Meanwhile, margins continue to fall because the company has to continually invest in its business in order to compete at scale. Overall, then, EBAY is a low and slowing revenue growth company with serious margin compression headwinds.
But eBay stock trades at nearly 19-times forward earnings. That is a pretty big multiple for sub-10% revenue growth and margin compression.
Bottom Line on eBay Stock
Don’t be fooled by the rising tide in digital retail. Not all digital retail platforms will succeed in the long term and not all digital retail stocks deserve big multiples.
EBAY is one of those digital retail platforms that will struggle over the next several years as competition heats up. And eBay stock isn’t priced for this reality. As such, this stock could be due for some serious weakness ahead.
As of this writing, Luke Lango was long AMZN, FB, JD, BABA, and TGT.