Investors' doubts about eBay's (EBAY -2.33%) future are understandable. Stay-at-home mandates forced consumers to shop online, but they aren't going to remain stuck at home forever. Indeed, many lockdowns are largely now lifted -- even if only on a partial basis -- and months of cabin fever have now translated into modest crowds in public places. These people aren't going to need eBay in the near future like they did in the recent past. That's a key part of the reason eBay shares have fallen nearly 6% since their July peak, with about half of that unfurling just since the company released its second-quarter results after Tuesday's close.
That worry-based selling may ultimately be a mistake, however. While it is true the second quarter's swell in online shopping will eventually fade, eBay is in the midst of a major overhaul that should leave it poised for better, more sustainable growth. It just needs a little more time.
By the numbers
For the quarter ending in June, eBay turned $2.86 billion worth of revenue into net operating income of $740 million. Per share, that's an adjusted profit of $1.08. Both measures are better than the year-ago bottom line of $0.66 per share, or income of $400 million. Sales were up quite a bit on a year-over-year basis too, growing 18% from Q2 2018's $2.42 billion. Analysts were only modeling a per share profit of $1.05, on revenue of $2.79 billion.
By all measures it was a victorious quarter. The stock tumbled anyway. Why? In simplest terms, investors don't seem convinced enough that COVID-19-inspired red-hot growth will last. Nobody explicitly said as much, but given how bullish the market was on eBay in July, there's little else to explain the pullback.
The thing is, these concerned investors are right. The coronavirus-driven surge in online shopping won't persist this much for much longer. However, eBay's got more in store to drive growth later this year and into 2021.
After several quarters of intense pressure from activist investor outfits Starboard Value and Elliott Management, eBay finally acquiesced. In 2019, it agreed to a strategic review of its entire business -- corporate code for starting to shed the classifieds businesses and non-core properties that Elliott and Starboard wanted the company to step away from. By February of this year, it had sold its online ticket sales platform StubHub for a little over $4 billion in cash, and in July it announced it would be selling its classifieds arm to Adevinta for $2.5 billion in cash plus 540 million shares of the publicly traded buyer. That made the deal worth more than $9 billion at the time.
Perhaps the biggest change eBay has been through just within the past few months, however, is the hiring of Jamie Iannone as CEO in April. He's a former executive with Walmart (WMT -1.93%), where he served as the Chief Operating Officer of Walmart eCommerce. Before that, he was the CEO of Walmart's Sam's Club digital arm SamsClub.com. eBay's announcement credited Iannone with much of Sam's Club's entry into the digital realm. He's also a former Barnes & Noble executive, where he served as the President of Digital Products including, most notably, its NOOK device. Before that, he was actually with eBay. His first time around his job included creating a tailored shopping experience for its users.
In short, when it comes to building a platform that keeps consumers coming back, he's got the chops. He's also now got more than another $6 billion in cash either on the way or on hand, with the potential sale of around $7 billion worth of Adevinta on the radar. Liquidity for the purpose of making investments isn't a problem.
Put it on your radar, if not in your portfolio
What is a problem -- perhaps the only real problem -- is time. Iannone just hasn't had enough of it. He only took the helm in April, when most of North America was still scrambling to figure out how we were supposed to adapt to the coronavirus contagion. Like most other consumer-facing companies, eBay has been too busy playing defense since March to think meaningfully about playing offense. The same even goes for the ruler of e-commerce, Amazon.com (AMZN -1.57%), which in March stopped accepting some deliveries of non-essential goods just so it could focus on distributing consumer staples and health-related items.
As the COVID-19 dust starts to settle, though, look for eBay to undergo a paradigm shift that focuses on the sort of personalization its current CEO has delivered in the past. Not only can the company better focus on its e-commerce platform without the distraction of StubHub and its classifieds arm, but eBay can also now start to tap into Iannone's wealth of experience. He's got great ideas, some of which were discussed during the Q2 conference call. He's just not had time or opportunity (and perhaps funding) to focus on them. Now he does.
As for timing, no two corporate overhauls are the same. Given the sort of reimagining eBay deserves, though, this particular overhaul is likely to be measured in months and quarters -- not weeks, but also not years.
In other words, it's one to add to your watchlist, even if it's not quite ready to add to your portfolio. COVID-19's effect, for better or worse, should have little to do with any decision to own eBay.