eBay's (EBAY 1.76%) business has shined through the early phases of the COVID-19 pandemic. The online marketplace has benefited from the stampede toward e-commerce shopping as more small businesses moved into that channel. eBay also saw major gains from its asset-light operating model that helps it stand out from more integrated rivals like Walmart and Amazon. These wins have helped the stock gain over 50% so far in 2020 compared to a 5% increase in the broader market.
Let's look at a few of the biggest ways that eBay's business seems fundamentally stronger in today's selling environment.
It would be an understatement to say that COVID-19 had a dramatic impact on eBay's usage figures. In the four quarters leading up to the pandemic-influenced Q2, after all, the company posted flat or declining global sales volumes. Its best result in the core U.S. market on that score was a 4% decline, in fact, and its worst was a 9% drop.
eBay's Q2 changed that trend, with volume soaring 35% in the U.S. and rising 26% in the international segment. As a result, merchandise volume increased 29% for the period. To put that gain into context, eBay boosted its volume by $5.9 billion last quarter compared to a $4.4 billion decline in all of fiscal 2019.
The good news on engagement extended to its pool of buyers and sellers. New buyer growth rose at its fastest pace in several years, gaining 5% compared to 2% in each of the last two quarters. “Our team’s focus on supporting small businesses and communities during a period of heightened need allowed us to re-engage our existing buyers and sellers while introducing approximately 8 million new customers to our platform during the [second] quarter,” CEO Jamie Iannone said last month.
An efficient business
Because eBay leaves many aspects of sales logistics to others, including shipping and inventory maintenance, it avoided some of the financial challenges that tripped up its rivals lately. The marketplace didn't have to take large inventory writedowns, as Walmart did on unsold apparel. It also had no issues with closed fulfillment centers, like the ones that pressured Stitch Fix in the period.
Instead, eBay's middleman focus allowed it to simply profit from connecting buyers to sellers. Its average fee held steady at 9% of revenue. Operating expenses even fell whereas those costs have been rising for most other integrated retailers. Operating margin jumped to 34% of sales last quarter, up from 29% a year ago and 32% in the prior quarter.
Cash is flowing
The metric that most directly impacts short-term investor returns is cash flow, which has always been strong for this business but is now reaching new heights. eBay generated $866 million of free cash flow in Q2, translating into 30% of its sales base. That capital allowed management to pay out the dividend, repurchase shares, and reduce its debt burden.
eBay is predicting that growth will slow in the second half of 2020, and so investors can't expect anything like the 29% volume spike to apply to the broader fiscal year. But the company is still targeting organic sales gains of between 14% and 17% compared to its initial forecast of a flat result.
Growth could slow even more in 2021 as consumer behavior settles back toward normal. However, eBay should still have several valuable assets at that time, including a bigger user base. The main factor influencing investor returns from here will be how well Iannone and his team allocate all the extra capital that business is generating. That cash will go toward extending the faster growth profile, but also directly back to shareholders in the form of rising dividends and stock buyback spending.