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eBay Earnings: What to Watch

By Adam Levy – Apr 23, 2018 at 8:22PM

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Is eBay keeping up with the competition?

eBay (EBAY -2.33%) will report its first-quarter earnings after the bell on Wednesday. After hitting the consensus estimates for its fourth-quarter earnings spot on, eBay, which will report its first-quarter earnings Wednesday, will look to match the Street's expectations of $0.53 per share on $2.59 billion of revenue for the first quarter.

But eBay investors will want to pay attention to a few other details in the company's earnings release in order to make sure eBay is withstanding the competition from (AMZN -1.57%) and Walmart (WMT -1.93%). Here's what to watch.

eBay's office in Berlin.

Image source: eBay.

Gross merchandise volume growth

eBay has seen its growth in U.S. marketplace gross merchandise volume (GMV) accelerate from 1% to 7% over the past five quarters despite intense competition from Amazon and Walmart. Investors should look for that trend to continue. Management's 2018 full-year guidance calls for a 1 percentage-point acceleration in overall GMV growth at its midpoint to about 7%. That growth is still well behind Amazon and Walmart.

Walmart grew online sales over 50% in the first three quarters of last year, and it expects 40% growth for the full year of 2018. Amazon's net product sales grew over 25% last year, and its GMV grew even faster as third-party merchants made up a larger percentage of sales. Still, eBay is managing to move in the right direction.

There are several drivers that investors should pay attention to with regard to eBay's GMV. The first is growth in active buyers, which reached 170 million last quarter, up 5% year over year. That'll be another number for investors to pay attention to, especially in light of Amazon's recent announcement of reaching 100 million paid Prime members after reporting its best year ever of Prime membership growth.

Other factors like various product improvements are a lot harder to measure. eBay is focused on delivering stronger search results, providing product-based listings, improving customer service, and expediting the shipping and return process. Look for commentary from management about the progress of those features to more U.S. and international users.

First-party advertising

eBay is shifting more of its advertising to first-party ads that promote listings on eBay instead of sending customers to other websites. First-party ads present a huge strategic benefit of keeping customers on eBay, enabling it to win twice -- once from the ad, and again from the transaction.

eBay lumps its first-party advertising revenue in with its marketplace revenue, not its marketing services. As eBay transitions more of its ad inventory, it should put pressure on its marketing services and other line item. That said, investors should look for commentary from management for more specifics. For example, CEO Devin Wenig told analysts first-party ad revenue grew 50% sequentially in the fourth quarter.

First-party advertising can be a real profit driver. Amazon saw its North American operating profit balloon in the fourth quarter as ad sales on its website picked up. Morgan Stanley analyst Brian Nowak thinks eBay's ad business can grow to $450 million by 2020, increasing by an average of 110% annually. That would put a lot of money in eBay's bottom line.

Everything else -- marketing expense, PayPal transition

eBay has been spending on brand advertising campaigns to help increase total buyers on its platform. Management says it plans to invest more heavily in its brand this year, which will show up in the company's marketing expense. As long as the spending is paying off with an increase in buyers on the platform and improving GMV growth, investors shouldn't be concerned by the increased marketing expense. Still, it's worth keeping an eye on it to make sure that investment is really paying off.

Investors should also listen for further commentary on eBay's progress toward its transition away from PayPal. eBay announced plans to start processing payments in-house when it released its fourth-quarter results in January.

eBay will be able to process payments for only a small percentage of transactions this year, but it needs to build out the technology and operations to do so. That could negatively impact margins in the near term, but it's expected to provide a big opportunity in the future.

There's a lot going on at eBay, and investors will likely have to look past the headline numbers to determine whether it had a good first quarter.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, eBay, and PayPal Holdings. The Motley Fool has a disclosure policy.

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