Investors had every reason to expect some impressive third-quarter earnings results from eBay (EBAY 0.19%). The online marketplace has been a big beneficiary of the shift toward e-commerce that's been accelerated by the pandemic in 2020.
This past week, eBay showed that this surge in demand is holding up even through the resumption of physical retailing activities across the world. The company is converting more of that growth into profits, too.
Let's dive right into eBay's Q3 report.
Strong growth across the board
Wall Street was bracing for a slowdown as compared to the peak COVID-19 closure period in the second quarter, but still expecting solid sales growth. eBay's actual volume increase landed at a surprisingly strong 21% compared to 29% last quarter and flat or negative results in each of the prior three quarters. Management had predicted high-teen-percentage growth.
Image source: Getty Images.
The quality of those gains showed up in a few areas. eBay's active buyer pool rose 5%, for example, to match its best quarterly showing in several years. The company performed well in the U.S., where sales rose 33%. Yet the international segment expanded aggressively, too, at 14%. "Our performance reflects the strength of our newly focused strategy coupled with the enormous untapped potential of our marketplace," CEO Jamie Iannone said in a press release.
Rising profits
eBay's asset-light selling approach, which avoids expensive commitments in areas like manufacturing and shipping, results in a far higher profit margin than peers like Amazon.com. The company extended that performance gap in the third quarter as operating expenses fell and the fees it charges buyers rose. The combination of those trends pushed operating margin to 30.7% of sales from 26.7% a year ago and supported a 64% spike in non-GAAP earnings per share.
EBAY Operating Margin (TTM) data by YCharts.
Cash flow was strong at over $700 million and free cash flow landed at $584 million.
Management used some of the cash windfall to repay debt. It also directed $700 million toward stock repurchase spending and sent out $111 million in dividend payments.
Bright holiday ahead
eBay raised its 2020 outlook again and now sees organic growth landing between 19% and 20%, up from the prior forecast range of between 14% and 16%. Earnings per share got a similar upgrade, with profits set to reach between $3.34 and $3.40 rather than the earlier $3.04-$3.16 range.
That outlook implies that organic sales could rise by over 20% for the third consecutive quarter during the key holiday shopping period ahead. It also incorporates a significant contribution from eBay's growing payments processing platform.
Investors will have to wait until early next year to hear management's outlook for 2021. That fiscal year will face a tough comparison with COVID-19 demand spikes that started in March and might also be impacted by lingering recessions in key markets like the U.S.
But for now, eBay's business is showing no signs of slowing down in either its market share performance or its ability to generate market-leading profit margins. Those factors, plus increasing direct cash returns, give investors more reasons to like owning this successful growth stock.
