After a couple investments from big activist investors, eBay (NASDAQ:EBAY) is being forced to take a long, hard look at its business and determine the best path forward to create shareholder value. That means determining where to focus energies in order to drive meaningful growth. The online marketplace has struggled to grow gross merchandise volume, but it has produced margin expansion as it grows its advertising business and transitions sellers to its own payments platform.
In order to improve its focus on growing its core business, investors want to see eBay reassess its portfolio of brands and businesses. The company already agreed to a small sale of its German flash-sale website, brands4friends, earlier this month. But investors want to see what it does with its biggest businesses outside of the eBay marketplace -- StubHub and Classifieds.
"We're making significant progress in actively reviewing the role and value of StubHub and Classifieds in our portfolio," CEO Devin Wenig said during the company's second-quarter earnings call. "The review is under way and we're focused on determining the best path forward to create shareholder value."
When Elliott Management bought a stake in eBay earlier this year, it wrote a letter to the board of directors, imploring them to take a strategic review of the business, specifically focusing on StubHub and the Classifieds business. "StubHub and eBay's portfolio of Classifieds properties represent high-value, strategic assets that are worth meaningfully more than the value currently being ascribed to them as part of eBay," the activist investor wrote.
Both StubHub and Classifieds are growing faster than eBay's marketplace. Classifieds revenue growth is, in fact, accelerating on an foreign exchange-neutral basis. StubHub's growth is more seasonal, however, as it's impacted by big events. Still, it has generally outpaced the slowing revenue growth of eBay's core marketplace.
That said, both businesses are considerably smaller than the marketplace business. Each accounts for just about 10% of eBay's total net revenues. For eBay to really grow, it needs to focus on improving the business that accounts for the other 80% of revenue. Selling off its smaller businesses will provide capital to invest in growth initiatives and give StubHub and Classifieds the opportunity to realize their full value outside of eBay.
It could hurt at first
While divesting noncore assets sooner is better than later, it's worth noting that the stand-alone eBay marketplace business faces a couple of big headwinds.
First and foremost is the expansion of marketplace sales tax in the United States. Some states started requiring the collection of sales tax for nonlocal businesses this year. eBay started the year collecting and remitting sales tax for three states, but that expanded to nine states by the end of June. Management expects that number to expand to 32 by the end of the year.
"We're seeing an impact mostly on higher priced items, and in Q2 this drove more than a point reduction of year-over-year growth in the U.S.," CFO Scott Schenkel told analysts. "We expect this dynamic to continue and likely accelerate for the rest of the year."
Outside of the U.S., eBay faces an uncertain economic environment in Europe, especially the U.K., as Brexit puts pressure on the entire region. The challenges there led to a deceleration in revenue growth for eBay's international marketplace segment, which was only partially offset by success in other parts of the world. The fallout from the ongoing Brexit ordeal will be tough for eBay as well as for other marketplace businesses across Europe.
But these challenges may only increase the importance of selling off StubHub and Classifieds in order to focus on the marketplace business and invest in more strategic growth initiatives. Meanwhile, the company has already shown considerable margin expansion in the marketplace business as it shifts more merchants to its own payment intermediation and grows its advertising business. Continued margin expansion in the face of the above headwinds will be a key indicator of eBay's health.