Investors seem to be growing more optimistic about eBay's (EBAY +1.99%) business by the day. The stock has trounced the market so far this year, up almost 20% compared to an 8% boost for the S&P 500.
There are good reasons for the giddiness. After all, while many traditional retailers are struggling, the online selling titan has the wind at its back. Sales growth is speeding up and management is making a wide range of improvements to its service that could be laying the foundation for many years of solid profit gains.
Image source: Getty Images.
Below, we'll look at a few of the key trends for investors to watch when eBay reports its fiscal second-quarter results after the market closes on Thursday, July 20.
Growth momentum
eBay's most recent quarterly report contained plenty of evidence of gathering momentum in the business. The online marketplace added 2 million active buyers to its user base, and that 4% boost was its quickest overall expansion rate in almost a year. Gross merchandise volume in the core U.S. market, meanwhile, grew at the fastest rate since 2014.
Image source: eBay investor presentation.
Management credited a healthy e-commerce industry for a big part of that speedup. In a conference call with investors in April, CEO Devin Wenig described a "relatively robust consumer-spending environment" that provided a "tailwind for our business." eBay was also helped along by improvements to its home page and its product listings, along with a successful brand marketing campaign.
Wenig and his team are projecting a slight growth moderation this quarter as currency-neutral revenue growth comes in at between 5% and 7%, compared to last quarter's 7% gain.
Product improvements
eBay has decided to take some aggressive steps toward improving fundamental aspects of its sales platform. These include very visible changes like a redesigned home page, but most of the shifts are happening behind the scenes where software engineers are changing how browsing pages are linked together and how they're indexed with search engines. eBay is hoping the moves boost traffic and conversion rates while making advertising more efficient.
The early results from these upgrades have been positive, and that's given the company confidence to speed up their rollout through the rest of the year. There's no guarantee that the changes don't hurt eBay's traffic trends or send conversion rates lower as it works through the kinks, though. "Our plans are not without risk," Wenig explained to investors back in April .
Costs and profits
Investors will want to keep a close eye on expenses, which have crept higher lately. In fact, operating costs jumped to 47.6% of sales last quarter, up nearly 3 full percentage points as eBay ramped up spending on product development and on sales and marketing. As a result, operating margin dipped to 30% of sales from 33.4% a year ago. The extra spending also helped push free cash flow lower by 7%, too.
Executives are projecting another quarter of slipping profitability ahead. Their earnings outlook ranges from $0.43 per share to $0.45, which would mark zero growth at the low end of the forecast. Sales should come in at between $2.28 billion and $2.32 billion. eBay's full-year guidance hasn't changed since January and still sees sales rising at about 7% in 2017.
Wall Street is a tad more optimistic than the management team about the short term, with consensus estimates calling for $2.31 billion of revenue and $0.45 per share of earnings this quarter.
