After Earnings, Investors Are Worried About eBay Inc’s Near-Term Profits

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EBAY - After Earnings, Investors Are Worried About eBay Inc’s Near-Term Profits

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Whoops. Though most shareholders were prepared for at least another decent earnings and revenue beat from online auction outfit eBay Inc (NASDAQ:EBAY), that optimism was a bit misplaced. The company only matched earnings estimates, and fell a tad short of analysts’ top-line outlook. End result: EBAY stock was off to the tune of 5% in Thursday’s premarket trading.

An exaggerated response to a not-disastrous first quarter report?

With a forward-looking P/E of 15.6, perhaps the knee-jerk reaction was a bit much. On the other hand, eBay still has to prove it can secure a decent return on its ramped-up spending.

eBay Earnings Recap

For the quarter ending in March, eBay turned revenue of $2.58 billion into a per-share operating profit of 53 cents. Both figures were well up from year-ago levels of $2.22 billion and earnings of 49 cents per share, respectively. But, analysts were calling for earnings of 53 cents per share on revenue of $2.59 billion.

Though the numbers more or less met expectations, traders were looking for a healthy beat.

The company’s thinning profit margins made matters at least slightly more alarming. Non-GAAP margins slipped from 28.9% to 27.9%. Significant increases in sales and marketing expenses and product development — the company’s two biggest operating expenses — mostly  drove the decrease. Operating cash flow fell from $582 million in the same quarter a year earlier to $495 million last quarter.

CEO Devin Wenig commented on the results: “In Q1 we drove good growth and made further progress with our multi-year effort to transform our customer experience and sharpen the eBay brand.”

The problem is, thus far, investors don’t seem to care for the costs involved with that transformation.

A Birdseye View

Last quarter’s increasing expenses may ultimately reflect an ongoing battle with an ever-growing Amazon.com, Inc. (NASDAQ:AMZN), which is pushing its way onto everyone’s turf.

Also weighing in on EBAY stock, however, is the waning relationship with the popular Paypal Holdings Inc (NASDAQ:PYPL). By severing most ties with PayPal, PayPal is freed up to work with services that compete directly with eBay. Many of the site’s current users are also loyal fans of PayPal, and may follow it to other services.

Yet, even with Wednesday’s 6% post-close setback, eBay stock is up more than 50% for the past year, with a string of revenue and earnings growth to back up the rally.

Perhaps above all else, the move toward rival payment processor Adyen, is ultimately expected to give eBay and its sellers more control, and at a lower cost. As Morgan Stanley analyst Brian Nowak explained when he upgraded eBay from an “Underweight” to an “Overweight” just a few days ago: “We are bullish about this initiative as we’ve seen other leading platforms … observe higher user conversion/spend from.”

It’s not just a matter of gaining more, better and more profitable control of its payments-processing architecture though. And so far, eBay’s evolution has been rather resilient to the Amazon effect.

Earlier this year, Wenig laid out eBay’s maturation from a platform that was “wired for a particular use case that was 20 years old” to a venue that’s prepared for the “absolute revolution of e-commerce around the world.” He added “What is going to emerge… is a couple of very big omnichannel shopping destinations. And we’re going to be one of them.”

It remains to be seen, however, if the costs stemming from this evolution will pay for themselves. Traders clearly weren’t willing to give eBay the benefit of the doubt immediately following the release of Q1 earnings.

Looking Ahead for EBAY Stock

Prior to the eBay earnings report posted following Wednesday’s close, analysts were modeling a full-year profit of $2.29 per share and sales of $11.0 billion, both up from year-ago comparisons of $2.00 per share and a top line of $9.57 billion.

eBay offered guidance that was less than thrilling, suggesting it would produce revenue of between $10.9 billion and $11.1 billion for 2018, translating per-share profits of between $2.25 and $2.30.

The company’s tepid guidance implies that increased spending on other fronts is going to sap any benefit from the gradual severance with PayPal — for the time being anyway.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/ebay-earnings/.

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