Investors had high expectations heading into eBay's (NASDAQ:EBAY) holiday-quarter earnings announcement, but the online marketplace still managed to surprise Wall Street last week.

On Feb. 3, eBay revealed robust sales growth, rising profitability, and strong cash flow as it closed out a record 2020. CEO Jamie Iannone and his team also issued a bullish outlook for the start of 2021.

Sales beat expectations

eBay continued to benefit from the new focus that the pandemic has placed on e-commerce. Sales volume rose 28% year over year, coming in higher than what management had forecast in late October. That boost pushed gross merchandise value past the $100 billion mark for the year, up 17% from 2019.

A young woman shopping online.

Image source: Getty Images.

The company differentiated itself from other online retailers like Walmart and Amazon in niche categories like collectable sneakers and luxury watches. The platform was a hit with people seeking refurbished products too. These wins allowed eBay to speed up its growth in active buyers, with that metric rising 7% year over year in the fourth quarter, up from 5% the previous quarter.

More than 185 million shoppers have made a purchase on the marketplace in the past year. "eBay was able to be there for our buyers, sellers, and community, especially in the face of a global pandemic," Iannone said in the press release.

Gushing cash flow

eBay's asset-light approach, which avoids many of the inventory and fulfillment challenges that plague other online retailers, delivered impressive financial results. Fourth-quarter operating margin rose 2.2 percentage points year over year to 23.6%. That win came from a combination of lower expenses and the fact eBay is collecting additional fees for advertising services it offers to sellers. Almost all those gains trickled down to the bottom line with earnings jumping 49% for the year to $3.41 per share.

EBAY Operating Margin (TTM) Chart

Data by YCharts.

eBay's cash flow trends were equally impressive and supported higher dividend payments and extra spending on stock buybacks. The $2.65 billion of free cash flow it generated in 2020 translates to 26% of revenue.

Looking ahead

Executives said they're prepared to spend aggressively in 2021 to defend the market share they've won in recent quarters. These capital initiatives will include tech development and dozens of small and large improvements to the shopping, buying, and fulfillment processes. eBay is hoping to build on the growth it has seen in categories ranging from luxury to certified preowned merchandise.

Management issued a bullish outlook for the first quarter, which will go up against the first report of 2020 when the company began to see the early effects of the pandemic. Organic sales this time around are on pace to rise between 35% and 37% year over year, according to guidance.

The growth comparisons get much harder from there, but eBay's momentum suggests investors will see another year of solid sales and increasing cash returns from this highly profitable business.

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