eBay (EBAY 1.55%) is implementing multiple initiatives to accelerate growth, and the most recent financial report from the company suggests that these moves are generating the desired results. Sales growth is accelerating, profit margins are increasing, and eBay stock still looks attractively valued at current price levels. Is now the right time to invest in eBay?
eBay has a plan
E-commerce is one of the most promising industries around. However, eBay has considerably lagged industry leader Amazon.com (AMZN 2.20%) in terms of revenue growth over the past several years. Not only is Amazon growing at a much faster rate than eBay, but Amazon is also making a growing share of revenue from third-party sellers, a major competitive threat for eBay. Amazon third-party units accounted for 48% of all paid units in the first quarter of 2016, an 400-basis-point year-over-year increase.
In this context, eBay is working on multiple areas to accelerate growth. The company is improving its product inventory and giving more visibility to unique items on the platform. In addition, sellers are required to provide more and better product descriptions, including pictures and images to make the shopping experience friendlier and more enjoyable.
The main idea is generating more data and making a better use of such data, so customers can easily find what they want on the eBay website. At the same time, management is educating sellers on inventory gaps and opportunities, as well as strategies to generate better rankings in search results.
The plan seems to be working
eBay still has a lot of room for improvement, but financial reports for the second quarter of 2016 indicate that recent initiatives to accelerate growth are delivering results. Gross merchandise value amounted to $20.9 billion during the period, representing a 4% increase in U.S. dollars and 6% growth in constant currency terms. This is an acceleration versus an annual increase of 1% in gross merchandise value during the first quarter of the year.
Total revenue was $2.2 billion in the second quarter, increasing 6% in U.S. dollars and 7% in constant currencies. StubHub and classifieds were particularly strong growth drivers during the quarter. StubHub produced $1.1 billion in gross merchandise value, a 35% increase. Revenue from StubHub amounted to $225 million, a 40% increase versus the same quarter in 2015. As for the classifieds platform, it generated $207 million in sales during the period, jumping by 15% year over year.
Profitability is also expanding. The operating profit margin increased from 20.3% of sales in the first quarter of 2015 to 23.8% of revenue. Free cash flow was $617 million, or 28% of revenue, during the quarter. In a sign of confidence, management raised its sales guidance for the full year of 2016 to between $8.85 billion and $8.95 billion, versus a previous guidance for between $8.6 billion and $8.8 billion.
A fair price tag
On the back of accelerating growth, eBay stock set fresh a record above $30 per share last week. The stock has gained over 20% in the past month alone, so momentum is clearly pointing in the right direction. On the other hand, none of this means that the stock is overvalued. In fact, current valuation levels look fairly attractive.
eBay stock carries a price-to-earnings ratio of 18.3, roughly in line with the average company in the S&P 500 index, which trades at a P/E of 19.3. According to data from Morningstar, the average P/E for companies in the same industry is over 34.
Considering eBay is one of the top players in a growing industry, the business model is widely profitable, and sales growth is gaining speed, this is a stock with attractive potential for gains from current valuation levels.