eBay (EBAY 0.90%) is the largest online marketplace in the U.S. not called Amazon (AMZN 1.28%). But the company might not be able to hold onto that title for long, as it consistently posts gross merchandise volume growth well below the annual e-commerce growth in the U.S. It's falling even further behind when you look at e-commerce growth on a global basis, where Amazon, Alibaba, and Flipkart -- which is soon to be majority-owned by Walmart (WMT -1.80%) -- have shown considerable strength.
But investors looking for an alternative to Amazon as an investment in e-commerce might do well with eBay. It's no longer a high-growth stock like Amazon or Alibaba, but it produces strong cash flow and management is committed to its capital return program, which certainly make shares worth a look.
Image source: eBay.
A small moat to protect it from Amazon
eBay has built a network of buyers and sellers that helps protect it from the competition. It's seen 171 million unique customers over the trailing 12 months. It also has over 25 million sellers on the platform.
By comparison, Amazon has more shoppers -- over 300 million -- but its number of sellers is considerably smaller. It reported 2 million third-party merchants a couple years ago, and it surpassed 1 million U.S.-based sellers this year.
eBay's biggest strength is in micro-merchants and consumers interested in selling their own items. The onboarding process for selling on eBay is relatively streamlined compared to Amazon's or Walmart's marketplaces, and it has enough shoppers to attract sellers. eBay particularly caters to people interested in selling just a few items. This strength allows eBay to offer a unique product selection compared to marketplaces primarily focused on larger sellers.
Improving the product for both buyers and sellers
Earlier this year, eBay announced plans to end its operating agreement with PayPal. It's partnering with Adyen to bring its payment processing in-house, which has the potential to streamline the process for sellers. eBay will look to roll in payment processing fees into seller fees, providing additional pricing transparency for sellers on the platform and reducing the cost of selling on eBay for many merchants.
Additionally, eBay will be able to provide better data to merchants since it will have a complete view of transactions on its platform. That reduces the need for merchants to rely on third-party tools to track their performance. The changes should enable eBay to compete more effectively against marketplaces like Amazon and Walmart.
eBay is also investing in artificial intelligence and its ability to organize product data, enabling a better product search experience for consumers. When you search for something on Amazon, for example, you can usually find one main product listing for which there's multiple merchants. Amazon automatically promotes the listing of the merchant with the lowest price and best reputation. It makes for a much cleaner and better user experience, and one eBay is working toward.
Further improvements on both the buyer and seller sides should lead to an increase in both supply and demand on the platform. eBay's ability to provide more structured product data to consumers will put it ahead of most other third-party marketplaces like Walmart, and more transparent pricing will put it on level with the competition.
Is it worth the price?
eBay currently trades at a historically high valuation. With a P/S ratio of 4.3, a P/E ratio of 24, a price-to-free-cash-flow ratio of 17.9, and an EV/EBITDA ratio of 13.1, eBay shares might seem expensive at first blush.
Data by YCharts.
But consider that P/S ratio is on par with Amazon's, and eBay sales generally carry a significantly higher operating margin. eBay's P/E, price-to-free-cash-flow, and EV/EBITDA ratios are slightly higher than Walmart's, but both metrics ought to improve significantly faster for eBay compared to the much larger Walmart. Analysts expect 15% annual EPS growth for eBay over the next five years versus just 6.5% growth for Walmart.
eBay's stock performance is bolstered by a healthy capital returns program. Management still has $6.6 billion left in its share repurchase authorization after spending $1 billion in the first quarter. eBay's cash flow is strong enough that it could initiate a dividend at some point in the future, returning even more capital to shareholders.
eBay shares seem fairly priced at their current valuation. Investors looking for a stable company with high exposure to e-commerce, good upside from its move to streamline its product for both buyers and sellers, and a strong capital returns program would do well with eBay stock.
