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Why eBay Stock Is Up 41% So Far in 2019

By John Ballard - Jul 3, 2019 at 5:09PM

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Investors have overlooked the slow growth in the marketplace business and focused on the growth happening in payments and advertising.

What happened

Shares of eBay ( EBAY -0.64% ) climbed 40.7% in the first half of 2019, according to data provided by S&P Global Market Intelligence. Instead of strong growth driving the shares higher, it seems the stock's low valuation was the main factor for the surge so far this year.

The company experienced a deceleration in gross merchandise volume (GMV) toward the end of 2018, which pulled down revenue growth. The weak growth on the top line disappointed investors who were hoping for more consistent performance as eBay tries to improve the marketplace business.

Growth in GMV remained weak in the first quarter of 2019, which caused revenue growth to decelerate to just 2% year over year. However, the bad news was clearly already priced into the stock price, and investors were quick to scoop up a bargain.

The eBay corporate logo on the roof of an office building at night.

IMAGE SOURCE: EBAY.

So what

Management has been transitioning its active users to a new, improved marketplace that features a simplified buying experience. While these efforts have received positive feedback with new buyers, it has created some problems in conversion rates for other users who are not accustomed to the new look.

Additionally, in the first quarter the company scaled back promotional spending on higher-priced items that weren't generating the returns management would like to see. This, in turn, further caused a deceleration in GMV, but management reported steady growth in the number of sold items on the marketplace.

Despite the slower growth in recent quarters, the stock was really cheap entering the year, trading at just over 10 times forward earnings estimates. Investors clearly sniffed a bargain and bidded up the share price in the first half of the year, especially as the slowdown in GMV and revenue seems to be a temporary issue, as other growth initiatives in payments and advertising are progressing well.

Now what

Investors are particularly optimistic about promoted listings, which eBay is implementing to reduce its dependence on third-party ad placements. More sellers are opting into promoted ads to help sell their items faster. eBay gets paid an extra fee by the seller when a listing sells due to a buyer clicking through a promoted ad. The company generated over $65 million of revenue in Q1 from promoted listings, putting eBay on track to generate $1 billion in revenue from this opportunity over time, which should be beneficial to margins.

Overall, the company's performance wasn't bad as many feared heading into the year. Based on first-quarter results, management raised the full-year outlook, now calling for currency-neutral revenue growth to be between 2% and 3%, and for adjusted earnings to rise 15% over 2018 at the midpoint of the estimated range of $2.64 to $2.70.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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