eBay's (NASDAQ:EBAY) second quarter results disappointed investors, with the stock down over 10% since the release.

While there were some positive developments, including strong earnings growth and an increase in gross merchandise volume (GMV), investors were more focused on the negatives of weak customer engagement trends and failure of eBay's recent marketing efforts to bring in new buyers to the marketplace segment.

Woman sitting in front of a laptop computer with the words "online shopping" displayed.


User engagement weakens

A key measure of eBay's customer engagement is active buyer growth, which decelerated to 3% when leaving out the three million additional users from the Giosis acquisition completed in the quarter. That's a significant deceleration over the year ago quarter's 5% growth rate.

Management blamed the decline on a surge last year of new customers buying low-priced fidget spinners. Sometimes companies deal with difficult year-over-year comparisons, and that is understandable. But the deceleration also revealed a weakness in eBay's efforts to attract new loyal customers. CFO Scott Schenkel said, regarding the spike in new customers last year, "We have not retained those new buyers to the extent that we have in the past."

Struggling to attract new buyers

eBay has increased its marketing spending in the last few quarters in order to bring in new shoppers and reignite its active buyer growth that was growing as much as 10% at the end 2014.

In the first six months of 2018, sales and marketing expense has increased 16% year over year, while revenue has only grown 9%. This increase, coupled with other increases in product development expense and overhead has caused operating profit to decline 4.1% so far this year. It's clear eBay is not getting the return on investment from marketing that it needs.

Speaking about their marketing efforts, CEO Devin Wenig said, "While our brand campaign has been well-regarded externally, it's not yet materially moved the needle on consideration, which is key to driving new buyer acquisition."

eBay's recent "Fill Your Cart with Color" campaign was an attempt to detach its brand from the garage sale style shopping experience of years past to a place consumers can find top brands.

One positive

On the positive side, Wenig explained that they are seeing "good performance" of new buyers that come to eBay and experience their new product pages that have been reworked through what management calls "structured data."

This initiative is making product listings in the marketplace easier to find and also makes the marketplace a more visually appealing place to shop. Management attributes GMV growth from 5% in the first quarter of 2017 to 7% this year to the new product experience, which has led to revenue accelerating from mid-single digits at this time last year to 9% in the second quarter.

So far, product categories representing just 3% of GMV have undergone the structured data treatment, which means as this gets rolled out throughout the marketplace, there could be further gains in GMV growth, as more buyers gravitate to more premium items that sell at higher prices.

More work to do

But there's still the problem of attracting those new active buyers. Accompanying the deceleration in active buyers has been a deceleration in the number of items sold in the marketplace, which was flat in the second quarter. There's only so much GMV (and revenue) will grow without corresponding improvements in these crucial metrics.

The focus on new product experiences dovetails with management's effort to rebrand eBay through marketing, which seems necessary to make eBay a consistently growing company over the long term. Wenig said they will "market aggressively" in the second half of the year in order to bring in more new buyers. It remains to be seen whether this will improve eBay's top line growth to the extent investors were expecting going into the year.

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