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Will eBay Announce Major Changes With Its First-Quarter Earnings?

By Demitri Kalogeropoulos – Apr 20, 2019 at 2:00PM

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With activist investors agitating for change, this report could bring news of big strategic shifts.

Investors have good reasons to tune in for eBay's (EBAY 0.09%) upcoming earnings report, set for the evening of April 23. That announcement will kick off fiscal 2019, for one, which is likely to mark the e-commerce giant's second straight year of decelerating sales growth.

This earnings report will also be management's next opportunity to explain how their shifting capital strategies – which might include divesting key parts of the business like StubHub -- could strengthen the core marketplace while generating solid long-term value for shareholders.

With that in mind, let's look at what investors might expect to hear from eBay on Tuesday.

A man buys a product using his laptop.

Image source: Getty Images.

Growth challenges

It wasn't long ago that eBay was boosting core sales at a 7% rate and targeting a second straight year of accelerating gains. But conditions worsened for the business in 2018, and revenue growth slowed to 6%.

Investors can expect more reductions ahead. In fact, management said in late January that sluggish sales volumes should combine with website optimization challenges to keep a lid on revenue growth this quarter and for the rest of 2019. CEO Devin Wenig and his team are predicting organic growth of just 1% at the midpoint of guidance for the fiscal first-quarter, with gains barely improving over the rest of the year to land at about 2%.

Looking deeper into the headline sales figure, keep an eye on the sales volume growth that eBay reports on Tuesday. That metric slipped into negative territory in the U.S. segment last quarter, which was a surprise considering the strong growth at e-commerce peers like Walmart and Amazon. eBay's global volume has slowed to flat over the past nine months, too, and needs to begin climbing again if the marketplace is going to protect its industry position.

Profitability wins

eBay's economic strength has always been a key reason why investors are attracted to this asset-light business. As a middleman sales platform, it doesn't maintain a huge shipping, inventory, or fulfilment network, and as a result, it can generate much higher profits than its fully-integrated peers. Operating income is over 20% of sales compared to below 5% for both Amazon and Walmart.

The good news is that this financial performance gap is likely to widen in 2019 as management gets more selective about the growth initiatives they choose to fund. Executives are also aiming to scale back on marketing spending while getting help from new revenue streams like payment processing and third-party advertising. Put it all together, and operating margin is expected to rise to between 28% of sales and 29% compared to 27% last year.

New directions

Much bigger strategic shifts are likely over the next few quarters, and eBay might announce a few of them this week. Activist investors have been pressuring the company to make aggressive changes in key areas like operating structure and capital allocation. Management hinted at potential outcomes from these demands in early March when they revealed a strategic review of eBay's assets including its classified business and its StubHub ticket segment.

That kind of review might lead to plans to sell off these ancillary units and use the proceeds to support faster marketplace growth and higher direct returns to shareholders. To date, management has proven receptive to complaints by its shareholders, and investors will learn this week whether that approach has yielded more changes in eBay's strategy for 2019 and beyond.

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

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