eBay (EBAY 1.60%) has been implementing several changes within its core marketplace business over the last few years to improve the buying experience. While the changes should improve engagement over the long haul, they have caused some disruption to buyer conversion in the short term. As a result, eBay has seen its growth in gross merchandise volume (GMV) decelerate this year.
Despite the softness in GMV growth, eBay stock is up 37% since the beginning of the year, and there are several catalysts that could send it higher. Here's why investors are giving the company a pass on slowing GMV growth and why they remain bullish on the company.
1. Marketplace engagement is healthy
One reason investors are not too concerned about the softness in GMV is that management guided for 2019 to be a year of transition. eBay has been fine-tuning its marketing strategy, such as pulling ad spending from areas that are not generating good returns (e.g., Google search) to invest in more profitable channels, such as social media. This has caused some disruption to buyer conversion in the marketplace.
Additionally, the internet sales tax is being adopted by more states and is causing some buyers to hold off on spending. However, management views this as a short-term issue because the underlying fundamentals of the marketplace look healthy.
There are three metrics that management monitors to gauge the health of the marketplace: active buyer growth, seller growth, and the number of listings. All three metrics are growing and are currently at their highest level ever. Throughout eBay's history, when all three metrics are strong, GMV growth usually follows.
One of the ways eBay is trying to improve buyer conversion and get GMV growing again is helping sellers get their listings in front of the right buyer at the right time through promoted listings.
With its advertising initiative, eBay is offering sellers the option to have listings promoted by eBay in exchange for an extra fee, and it's proven to be a popular new feature with sellers so far.
eBay generated $89 million in revenue from promoted listings in the second quarter, up 130% year over year, and management expects to generate $700 million in advertising revenue this year. It believes promoted listings will eventually generate $1 billion in annual revenue, or 10% of eBay's total revenue.
eBay's new payments service could be even more significant to growth than advertising. As part of the plan to end the long-running payment agreement with PayPal Holdings, eBay is taking control of payment processing to offer buyers more choice at checkout and save sellers some money with lower fees.
With the new payments platform, buyers can now check out using Apple Pay, Alphabet's Google Pay, as well as PayPal. eBay launched the service in the third quarter of 2018 and has processed $636 million in payments so far. When it's fully scaled, management expects the new service to generate $2 billion in annual revenue and $500 million in operating profit.
4. More value waiting to be unlocked
Investors are also optimistic that eBay could be on the verge of unlocking significant value from its Classifieds and StubHub businesses. In March, management announced it was pursuing a strategic review of these assets, which investors expect will likely lead to either a sale or spinoff of these businesses. This would unlock more cash that management could use to accelerate its growth plans, such as advertising and payments, and also provide more capital for dividends and share repurchases.
5. Capital returns
eBay generates a lot of free cash flow relative to revenue. Over the last year, it generated $2.5 billion in free cash flow on $10.86 billion of revenue, and management is returning much of it to shareholders.
The company has been taking advantage of the low valuation on the stock price over the last year by buying back a significant amount of shares, which has reduced the shares outstanding by 11.8% and boosted EPS. On a non-GAAP (adjusted) basis, EPS soared 28% year over year in the last quarter due to higher margins and a lower share count.
eBay also initiated its first dividend earlier this year. The quarterly payout is currently set to $0.14 per share, bringing the dividend yield to 1.37%.
It still faces plenty of competition from other e-commerce rivals, but if the company's GMV growth begins to improve over the next year, along with continued progress in advertising and payments, the stock could move higher from current levels.