eBay (NASDAQ:EBAY) is often forgotten in the conversation around e-commerce, as the focus has been on Amazon.com, brick-and-mortar retailers transitioning to omnichannel, and upstarts like Etsy and Wayfair. However, the online marketplace and auction house is still the second-largest online retailer in the U.S.
Last year, eBay brought in $10.7 billion in revenue, up 8.3% from the year before, and its gross merchandise volume (GMV), the total value of all sales on its platforms including StubHub, rose 7%, to $94.5 billion. eBay's slow sales growth may turn off investors, especially as the greater U.S. e-commerce sector has grown by about 15% annually since the Great Recession, though that rate has slowed in recent quarters.
However, the company's marketplace model generates impressive profit margins, especially compared to other e-commerce operators that have struggled to turn a profit. Last year, eBay's operating margin topped 25%.
That solid record of profit generation was also why eBay announced earlier that it would start paying a dividend of $0.14 a quarter, good for a 1.5% dividend yield.
Considering eBay's unique position in the retail market and the recent decision to start paying a dividend, investors may be wondering if the stock is worth buying. Let's take a closer look.
As the chart below shows, eBay stock has significantly underperformed fast-growing competitors in like Amazon, Etsy, and Wayfair in recent years, though it has still beaten the S&P 500.
eBay's value proposition to investors has changed significantly since it spun off Paypal in 2015. The company seemed to be in search of its next growth engine, as StubHub, the sports-ticketing marketplace it owns, has also seen growth slow.
eBay's most recent results paint a conflicting picture. Revenue growth weakened significantly, increasing just 2%, or 4% in constant currency, while GMV fell 4%, or 1% in constant currency. Nonetheless, adjusted earnings per share surged 26%, due to effective cost controls, and the company raised its guidance for the year.
With eBay's well-known brand and millions of buyers and sellers, it may not be a surprise that the company's middling performance has attracted the attention of activist investors. In January, the stock surged as Elliott Management, an activist investment firm, revealed a stake of more than 4% in the online retailer and submitted a detailed turnaround plan to management, saying that the stock could be worth $55-$63, more than 50% above where it is today.
Elliott called for separating StubHub and eBay's classified business from the core marketplace, revitalizing the marketplace, increasing operational efficiency, returning capital to shareholders (which it's started doing), and ensuring that the right leadership is in place.
In response to the letter, eBay agreed in March to do a strategic review and also said it would combine its global marketplace business under one leadership team and add two new directors to the board. It said it expected to reveal the findings of the review this fall.
Is it a buy?
The results of eBay's strategic review and the process leading up to it will likely determine eBay's performance this year. However, there's a fundamental question of whether eBay can achieve a normal rate of growth for a U.S. e-commerce company.
Increasingly, eBay appears to be falling behind. Amazon is stepping up efforts to offer free one-day shipping to Prime members, Walmart and Target are pouring resources into e-commerce including same-day fulfillment, and companies like Etsy and Wayfair have picked off their own niches like handmade goods and home goods in the sector that may have once belonged eBay.
eBay's business problems seem to be similar to the stock's: There's simply no compelling value proposition. Why would someone shop on eBay rather than Amazon or another competitor?
I suspect some customers like the auction aspect, others are used to using it, and some arrive through a Google ad. However, eBay seems to struggle to bring in millennials and other younger online shoppers who flock to Amazon or more specialized sites, as its user base is barely growing. Active users increased just 4% in its most recent quarter.
eBay's stock also lacks a meaningful distinction. If you're looking for value, growth, or income, there are better options elsewhere. eBay is essentially, and weirdly, a dinosaur in a still-emerging industry. Though the turnaround opportunity may appeal to some investors, the upside seems limited.
Therefore, I can't call eBay a buy. Investors are better off putting their money to work elsewhere, including some of the e-commerce stocks mentioned above.