eBay (NASDAQ:EBAY) reports earnings for the third quarter on Wednesday, Oct. 18, after market close. The two key metrics investors should focus on are gross merchandise volume (GMV) and revenue, as these will tell us how well eBay's efforts to revitalize its marketplace are working.

eBay faces growing challenges from larger retailers

For the last few years, eBay's marketplace GMV (the value of items sold) and revenue have been growing at mid-single-digit rates, while Amazon.com consistently posts more than 20% net sales growth. Even Wal-Mart Stores has invested heavily in its online sales channels and has been seeing strong growth in net sales and GMV of more than 60% in the first half of 2017.

Since Amazon and Wal-Mart offer items from third-party merchants, they are increasingly taking share of online spending that could otherwise go to eBay.

Woman sitting on a couch shopping online with a laptop.


Progress on eBay's growth initiatives

Although progress has been slow to take effect, investments to improve the user-friendliness of eBay's marketplace have started to kick in, as noted in the acceleration of GMV and revenue growth in the second quarter.

Metric Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016
GMV YOY Growth 6% 5% 5% 4% 5%
Revenue YOY Growth 7% 5% 4% 5% 3%

GMV and revenue growth rates exclude the change in currency. Data source: Second-quarter earnings release. YOY = Year over year. 

With 1.1 billion listings to search through on eBay's marketplace, it can be difficult for potential buyers to find exactly what they are looking for. The company has been using artificial intelligence to better organize listings and personalize the browsing experience for the 171 million active buyers on its marketplace. One recent example of the improvements being made is a new filtering option to help eBay buyers find listings that offer free shipping -- something more online shoppers are expecting these days, especially with the growth of Amazon Prime.

eBay also recently launched new grouped listings, which will deliver search results of the most relevant items listed for sale and eliminate results that show many of the same items, which can discourage buyers from attempting a purchase.

Overall, progress is being made to make the marketplace more shopper-friendly and management has noted improvements.

However, results can be lumpy from quarter to quarter.  You can see this in the recent quarterly trend of earning per share growth and operating margin.

Metric Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016
Earnings per share YOY growth 5% 4% 8% 3% 2%
Operating margin 27.3% 30% 31.9% 29.9% 29.1%

Data source: Second-quarter earnings release. Earnings per share and operating margin are Non-GAAP. YOY = year over year.

Earnings growth has been lower than revenue due to higher spending going toward marketing as well as higher spending to improve the marketplace user experience. This is expected to continue in the third quarter.

What management expects

The ongoing release of new marketplace features, along with the new "Fill Your Cart with Color" advertising campaign are expected to be the key drivers of eBay's financial performance through the rest of the year.

For the third quarter, management is calling for revenue to grow between 6% and 8%, or a range of $2.35 billion to $2.39 billion. eBay has been facing currency headwinds, but this will be offset by share repurchases, which leaves expectations for earnings per share between $0.46 and $0.48, or growth of 3% to 7% year over year.

It's uncertain how much further eBay can accelerate its GMV and revenue growth with Amazon stretching its lead and Wal-Mart growing as fast as it is right now. eBay will not likely be able to keep up with Amazon -- the most popular online retail site, which helps Amazon attract more third-party merchant sellers.

On the other hand, if eBay can meet its guidance and keep showing gradual improvements in GMV, revenue, and earnings growth, that may be all that is needed to justify its modest P/E ratio of about 17 times expected full-year earnings.

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