These are boom times for many e-commerce retailing giants, but eBay (EBAY 2.93%) hasn't been invited to that party. In fact, the online marketplace saw its growth slow to a crawl in recent quarters. Management doesn't think that poor trend improved in the fiscal fourth quarter.
On the plus side, the company is predicting some significant improvements in profitability for fiscal 2018, which is more than rivals like Walmart can claim. eBay's year recently ended and its earnings report is due next week.
With that bigger picture in mind, let's take a look at the key details investors can expect to see from eBay when it posts earnings results on Tuesday, Jan. 29.
How low will growth go?
There's no debate about whether eBay's growth acceleration has petered out recently. After speeding up through all of fiscal 2017, key metrics in the core marketplace business are now pointing firmly in the opposite direction.
The expansion rate in its pool of active buyers, for one, has been 4% in each of the last three quarters compared to 5% in the prior four quarters. eBay's sales volume gains peaked at a 4% gain in mid-2017, too, before dropping to a 1% uptick in the first quarter of 2018. Its next two reports then showed zero growth in that key metric.
Investors should keep a close eye on these two figures since they'll describe whether operating trends are still worsening or have stabilized at a slower, but still positive rate. eBay executives are aiming for the latter scenario.
Are the new business lines helping?
CEO Devin Wenig and his team have pulled back marketing spending, which underlines their assessment that there are no quick fixes for speeding sales volume growth back up toward 4%. In contrast, executives have been optimistic about two new business lines, payments and advertising, that they see combining to add billions to its annual revenue haul.
Investors haven't seen much indication either way about how these niches will impact the top and bottom lines to date. However, eBay has been aggressively scaling up both offerings over the last few months, so there should be much more data that either supports -- or detracts from -- management's bright outlook.
What about cash returns going forward?
The good news for investors is that eBay's asset-light operating model is only getting more efficient these days. Thanks to the marketing pullback, management is targeting significant operating profit growth for the full 2018 year and double-digit profit gains. Its middleman focus has also kept it a leader in bottom-line profit margin when compared to fully integrated peers like Walmart and Amazon. Free cash flow is on pace to reach about $2 billion for the 2018 year.
Executives' initial comments on 2019 implied another step-up in profitability and even faster earnings growth. We'll find out this week whether that prediction has shifted over the last few months.
If it has improved, or even held steady, then investors can expect to see plenty of direct cash returns in 2019. Traditionally, eBay has delivered those funds just through stock repurchase spending. However, now that the company is settling into a slower, more profitable growth trajectory, it might be time for the management team to consider changing its allocation strategy by implementing a regular dividend payment. But first, eBay has to demonstrate that the business has stabilized.
Check out the latest eBay earnings call transcript.