Shares of e-commerce marketplace eBay (NASDAQ:EBAY) tanked after the company reported disappointing second quarter numbers, and, quite frankly, I’m not that surprised.
I’ve been pounding on the table since March that EBAY stock was way overvalued. Above $40, EBAY stock was being priced like a secular growth e-commerce company with healthy revenue and margin growth drivers.
But, that was never the case. EBAY stock was never supported by a secular growth narrative. Instead, although the company was improving its e-commerce platform to be more relevant in today’s retail environment, eBay largely remained yesterday’s favorite digital commerce marketplace. Consequently, the go-forward growth prospects on EBAY stock were never that good.
Fast forward a few months. It looks like Mr. Market is starting to see my side of the argument. In response to poor second quarter numbers which underscored the company’s meager growth prospects, EBAY stock has dropped below $35.
Is there more pain ahead? I think so.
Here’s a deeper look.
The eBay Story Is Plagued With Slow Growth
No matter where you look, you will see slow growth in eBay’s numbers.
Active-buyer growth was just 4% last quarter. That is pretty weak, and it is a noticeable step down from last year’s steady 5% active-buyer growth rate. Thus, active-buyer growth is low and only weakening, implying that the company may be nearing market saturation at around 200 million active buyers.
Gross merchandise value growth was just 7% last quarter. That is the same growth rate as the past several quarters. But, sold-items growth was flat, meaning the number of items sold on eBay last quarter was the same as in the year-ago quarter.
That implies that not only is the active-buyer base maxing out, but those buyers aren’t buying in any greater frequency, either. Moreover, sold-items growth has been on a consistent and steady downtrend over the past several quarters from 4% to 3% to 2% to 1% to 0%.
Revenues were up 6% in the quarter. Revenue growth has been running around 7% over the past several quarters. StubHub isn’t playing the part of savior here, as growth there was just 3% last quarter, its worst mark in several quarters. The Classified Ads business also isn’t doing any saving, as growth was just 10% last quarter, matching its worst mark in several quarters.
Overall, then, it is clear to see that eBay isn’t a turnaround story with solid go-forward growth prospects. Instead, this is a platform that is nearing its max potential in a crowded e-commerce space.
eBay Stock Could Fall Further
The worst part about the eBay narrative is that the company is investing a whole bunch of money to drive meager revenue growth.
The operating expense rate rose 180 basis points to 53% last quarter, driven by heavier marketing spend, more promotional activity, and product investments. But, those investments only drove 6% revenue growth. In other words, eBay is being forced to spend big in order to drive marginal revenue growth.
Going forward, then, the margin outlook is quite bleak. If the company stops investing, revenue growth will almost certainly flatline or go negative. But, if the company keeps investing, it will only drive mild revenue growth at lower margins.
For all these reasons, I can’t really see EBAY stock being worth much more than $35 today. This is a 6-7% revenue growth company with compressing margins that should be able to stabilize around 28% (versus 29.5% last year and 31.1% the year before that). Those assumptions lead me to believe that eBay can do about $3.20 in earnings per share in five years.
A market-average 16x forward multiple on $3.20 implies a four-year forward price target of ~$51. Discounted back by 10% per year, that equates to a present-day value of just under $35.
Bottom Line on EBAY Stock
Ugly second quarter numbers have plunged EBAY stock back into fair-value territory.
Considering the narrative is now on a negative course, momentum could very well drive EBAY stock into undervalued territory in the near future. As such, I see this stock heading toward the lower $30s over the next several weeks.
If EBAY stock does plunge toward $30, I think that could present a buying opportunity. Until then, it is best to wait on the sidelines.
As of this writing, Luke Lango did not hold any positions in any of the aforementioned securities.