Shares of struggling online retail marketplace eBay (NASDAQ:EBAY) have been largely range-bound over the past three years, bouncing between $30 and $40, as the company has struggled to compete in the dynamic e-commerce landscape.
But, there’s reason to believe that boring eBay stock could surge higher in 2020, thanks to the convergence of a few catalysts.
First, revenue growth trends should improve as the company’s ad business continues to expand. Core retail trends should also stabilize as the sizable internet sales tax headwind becomes less severe. Second, margin trends should improve, too, as management remains committed to cutting expenses. Third, the company’s buyback program will get a big boost from the $3.1 billion sale of StubHub.
Net net, improving revenue growth trends plus improving margin trends plus bigger buybacks, equals supercharged profit growth. At 12.3-times forward earnings, eBay stock is not priced for supercharged profit growth.
Consequently, the convergence of big growth on a discounted valuation should propel shares meaningfully higher over the coming months.
Big(ger) Growth is Coming
The bull thesis on eBay stock heading into 2020 centers around this idea that bigger profit growth is coming in 2020.
That is, over the past several years, eBay has struggled to find its way in the crowded, competitive, and dynamic e-commerce landscape. So, while broader e-commerce sales have roared higher, eBay’s revenues have struggled to even grow. At the same time, up until last year, eBay’s profit margins were under intense pressure. The company’s profit growth trends were exceptionally weak.
This could all change in 2020. For a few reasons.
First, eBay’s online garage sale model has staying power because it offers consumers an alternate route to purchasing goods online. Because of its staying power, eBay’s core retail growth trends should improve in 2020 once the internet sales tax headwind gets fully lapped. In 2019, U.S. states broadly implemented an internet sales tax which disproportionately hurt small sellers, from whom eBay makes the majority of its money — by mid-year, eBay will have fully lapped this headwind, so the year-over-year numbers should improve.
Even further, eBay’s ad business is on fire, and management expects double-digit growth there to persist throughout 2020. Big picture: renewed core retail growth on top of sustained big ad growth should lead to healthy revenue growth for eBay this year.
Second, margins will continue to expand meaningfully in 2020 thanks to management’s commitment to cost-cutting. Third, the company just sold StubHub for $3.1 billion. Management plans to roll those proceeds into buybacks, and eBay’s 2020 share buyback plans have expanded from $1.5 billion, to $4.5 billion.
What does stabilizing revenue growth plus expanding margins plus more buybacks equal? Bigger profit growth.
eBay Stock is Cheap
The attractive thing about eBay stock is that shares aren’t priced for bigger profit growth.
The forward earnings multiple on this stock is just 12.3. For comparison purposes, the S&P 500 trades at 19x forward earnings, the technology sector trades at 23x forward earnings, and the consumer discretionary sector trades at 24x forward earnings. Also, peer e-retailers like Amazon (NASDAQ:AMZN) and Etsy (NASDAQ:ETSY) trade at 75x and 45x forward earnings multiples, respectively.
In other words, eBay stock is dirt cheap.
Sure, the cheapness is warranted by weak profit growth trends. But, if those profit growth trends perk up, then eBay stock could fly higher on multiple expansion.
That’s exactly what will happen in 2020. As bigger profit growth converges on eBay’s dirt cheap valuation, the stock’s 12.3x forward earnings multiple will meaningfully expand, and power sizable gains in the stock.
eBay stock has been a sleeper for a long time. But, shares could wake up in 2020 as stabilizing revenue growth trends, expanding margins, and bigger buybacks fuel sizable profit growth. The combination of sizable profit growth and a dirt cheap valuation should result in the stock having a good year.
As of this writing, Luke Lango was long ETSY.