The Big Problem for eBay Is That Its Rivals Are Even Better

In this segment from the MarketFoolery podcast, host Mac Greer, Total Income's Ron Gross, and Million Dollar Portfolio's Matt Argersinger parse the problems of eBay (EBAY -0.14%), which is in the odd situation of growing its revenue 9% at the same time as it's losing market share to faster-growing rivals. It's already spending a lot of money in an effort to keep up with the likes of Amazon (AMZN -1.64%) and Wal-Mart (WMT 1.32%). It really is a great business, but what can it do from here?

A full transcript follows the video.

This video was recorded on Oct. 19, 2017.

Mac Greer: Matt, shares of eBay down on earnings. Big story here is, eBay is spending a lot to compete with a little company named Amazon.

Matt Argersinger: And probably not doing a great job of it. On the surface, things look great at eBay. Revenue, gross merchandise volume, up 9%. That's one of the better quarters in a while for eBay. The problem is, and their guidance for the fourth quarter, 68% growth, the problem is, e-commerce as a whole across the U.S. is growing at closer to 15%. So, I take those numbers and say, eBay, if you think about it, is actually potentially losing share. It's not growing as fast as the overall e-commerce market, whereas Amazon is, and of course, Wal-Mart and some other competitors who are investing heavily are as well. Disappointing, I would say, to see StubHub revenue up only 5%. This is another growth puller for the company. There's a lot of new competition out there with tickets and live events and resale. I was disappointed in that number. At the same time, eBay, this is a great business. If you think about it, they did $2.4 billion in revenue in the quarter. They generated $720 million in free cash flow from that number. That's a 30% free cash flow yield.

Greer: It seems like a lot.

Argersinger: Oh, yeah.

Ron Gross: It's all relative. [laughs]

Argersinger: There are a handful of companies in the world that can do those kind of free cash flow yields. But, taking the long-term view, what has eBay done for shareholders? I took a look at a five year chart of eBay, and this was adjusted for the PayPal spinoff. If you invested in eBay five years ago, you're up 75%. That's pretty respectable. Amazon over those five years, up 300%. At some point, Amazon took the vertical approach to e-commerce. They're the ones that invested in fulfillment, distribution, shipping, all those things that eBay said, we're going to stick with our light business model, we're not going to do that. And what happened is, Amazon captured a lot of those third-party sellers that used to love eBay, and may still use eBay to a certain extent, but they said, Amazon offers me so much more, and I can access so many more buyers, it just makes much more sense. So, I think eBay has lost that battle a little bit. It's still a great business, but I look at the growth, I look at the competition with Amazon, and I'm not sure what investors can expect buying today.

Gross: Sometimes I look at these things from the consumer's perspective. In fact, I try to do that as much as I can. I never got it, personally. In the early days, when it was auction related, it didn't appeal to me. Today, if I want to buy something, I'm much more likely to go to Amazon. 100 times more likely. It looks and feels different. "Fulfilled by Amazon" is a big deal to me, it gives you the sense that Amazon is there taking care of you, watching the transaction, even if they're not. Amazon Prime is a big deal. So, I can't say, as a consumer, unless it's some really difficult to find item, ever choosing eBay over Amazon.

Greer: As an investor, what would be the best single argument for investing in eBay instead of Amazon?

Argersinger: On a profitability basis, eBay crushes Amazon. You look at that free cash flow, I talked about Amazon, it's comfortable not reporting any profits. eBay works as a business that can grow in the single digits, generate a ton of cash. They've been buying back stock, buy back more stock, maybe pay a dividend at some point. But this to me is more of a steady income play. They're still operating in the e-commerce space, which, of course, is a secular growth market to be in. I just don't think you're going to get amazing returns. You can get decent returns by buying eBay today.