How eBay's Strong Quarter Was Overshadowed by Weak Guidance

IMAGE SOURCE: EBAY, INC.

eBay (EBAY 1.96%) released yet another stronger-than-expected quarterly report Wednesday after the market close. But unlike last quarter's post-earnings pop, this time disappointing guidance sent shares shares of the online marketplace down nearly 11% when all was said and done.

Let's take a closer look at eBay's latest quarter. 

eBay results: The raw numbers

DATA SOURCE: EBAY INC.

What happened with eBay this quarter?

• Both eBay's top and bottom lines came in above guidance, which called for revenue of $2.16 billion to $2.19 billion and adjusted earnings per share of $0.42 to $0.44.
• Gross merchandise volume (GMV) increased 3% year over year as reported, to $20.1 billion, and would have grown 5% had it not been for the negative effects of foreign currency exchange.
•  eBay also added 1 million active buyers across its platforms, bringing its total number of active buyers to 165 million.
• That included:
• A 2% year-over-year increase (5% at constant currency) in marketplaces GMV, to $19.0 billion, which translated to revenue of $1.8 billion.
• A 23% increase in StubHub GMV, to $1.1 billion, which resulted in a 32% increase in StubHub revenue, to $263 million, driven by concerts, theater and baseball, as well as the the positive effects of "ongoing product innovation."
• Classifieds platforms revenue increased 11% year over year (14% at constant currency), to $197 million, driven again by strength in automotive and real estate.
• Active buyers climbed by 1 million from last quarter and increased 3% year over year, to 165 million.
• Repurchased 16.5 million shares during the quarter for $500 million, leaving $2.3 billion remaining under eBay's current repurchase authorization as of Sept. 30, 2016.
• eBay more recently sold the majority of its stake in MercadoLibre, realizing "a significant gain on its investment." eBay will use the proceeds in a manner consistent with its current capital allocation initiatives.
• The company generated $802 million in operating cash flow, and $617 million in free cash flow from continuing operations.
• It ended the quarter with $10.4 billion in cash, cash equivalents, and non-equity investments, and just over $9 billion in debt.

What management had to say

CEO Devin Wenig stated, "In Q3 we delivered good top- and bottom-line financial results, led by consistent performance across our business. We continued to transform the shopping experience on eBay, delivered more personalization capabilities and began to activate our updated brand messaging."

During the subsequent conference call, CFO Scott Schenkel added:

While accelerating our revenue growth this year, we increased investment in product development and brand to invest in future growth. That combined with our recent acquisitions and integrations has been paid for with operating leverage in G&A and redeployment within marketing. And while we are relatively well protected on net income due to our hedging program, the stronger U.S. dollar has driven roughly 150 basis points of ongoing margin compression year over year.

Looking forward

For the current quarter, eBay expects revenue of $2.36 billion and $2.41 billion, representing year-over-year currency-neutral growth of 4% to 6%. On the bottom line, that should result in adjusted earnings per share in the range of $0.52 to $0.54. By comparison -- and keeping in mind we don't typically pay close attention to Wall Street's near-term demands -- analysts' consensus estimates called for fourth-quarter revenue and earnings near the high end of eBay's respective guidance ranges.

Finally, for the full year of 2016, eBay now anticipates revenue of $8.95 billion to $9.0 billion for the full year (an increase from its previous guidance range of $8.85 billion to $8.95 billion). But management also reiterated their prior guidance range for full-year 2016 adjusted earnings of $1.85 to $1.90, and elaborated during the subsequent conference call that they expect to arrive near the middle of that range if current trends persist.

To be fair, eBay's Q4 earnings guidance shortfall can be chalked up to both the aforementioned currency headwinds and -- to a lesser extent -- the faster growth of StubHub, which inherently comes with lower margins than eBay's core marketplaces platform.

What's more, it's worth noting that even after Thursday's drop, eBay stock is still up nearly 10% over the past three months thanks in part to its stellar quarterly report in July.

So despite eBay's seemingly disappointing Q4 guidance (and in light of yet another strong quarterly report for Q3), I wouldn't read too much into today's drop as it relates to eBay's long-term thesis, which appears to remain firmly intact.