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eBay Enters a New Phase of Slower Growth

By Demitri Kalogeropoulos – Nov 4, 2018 at 3:13PM

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Yet the online marketplace predicted healthy profit gains ahead.

eBay (EBAY -2.38%) isn't growing as quickly as management had hoped it would, and the slowdown will pressure results for the online marketplace over at least the next few quarters. Those were the main takeaways from the company's recent third-quarter earnings report.

However, CEO Devin Wenig and his executive team are optimistic about the opportunities that lay ahead, especially around eBay's payment processing and advertising. Management discussed their reasons for that confidence in a conference call with analysts, where the company also gave its initial outlook for a cash-rich 2019.

Below are three key highlights from that presentation.

A man places his credit card information online.

Image source: Getty Images.

What went wrong

We made significant marketing investments this quarter. While some of these activities were successful and will scale, others did not deliver a sufficient return. These dynamics, coupled with the impact of a strong dollar on our U.S. export business, led to a two-point deceleration in marketplace volume growth. -- Wenig

Executives predicted back in July that sales growth would speed up in the second half of the year thanks to initiatives aimed at improving the buyer and seller marketplace experiences. Instead, sales volumes moved the other direction, slowing to a 5% expansion rate from 7% in the second quarter.

Management blamed world trade issues, including a weakening U.S. export business, for part of the slowdown. But they also admitted that many of their product marketing changes failed to meet their expectations. As a result, slower growth showed up in several of the marketplace's core metrics, including the unit count of products sold and the pool of active buyers.

Growth opportunities

Advertising and payments are two significant opportunities in front of us. -- Wenig

Executives don't see reasons to expect much improvement in gross merchandise volumes from the current modest pace. However, they do believe the new payments processing business will scale nicely over the next few quarters, and recent tests gave them confidence that the functionality will improve buyer conversion rates while reducing costs for sellers.

Advertising is a similarly attractive opportunity, as promoted listings should grow to a $1 billion annual business in just a few years. Together, the two niches could eventually lift eBay's annual revenue by around $3 billion while boosting profitability, management said.

Cash is coming

With growth at these lower levels, we expect to drive margin expansion and solid operating income growth, while making significant investments in payments ... and our advertising capabilities. -- CFO Scott Schenkel

Management is shifting gears and planning to direct fewer resources toward marketing its product listings. The change makes it more likely that marketplace volumes will remain sluggish. In fact, eBay now sees organic growth clocking in at 6% this year, below the 7% to 9% target management initially predicted.

The strategy will free up cash, though, which the company plans to direct toward more achievable growth areas like advertising and payments. That's a key reason why executives still think they'll hit their 2018 earnings target, even though sales are coming up short.

Looking further out, eBay's cash-rich operating model should strengthen further in 2019 thanks to higher profit margins and a falling share count as a result of management's aggressive stock repurchases. Putting these trends together, executives see double-digit earnings-per-share growth in 2019 that could reach as high as the mid-teen percentage range.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.

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