eBay (EBAY -1.27%) doesn't get as much attention as other top e-commerce stocks, and it's understandable. Before and during the pandemic, eBay didn't post the impressive growth rates of companies like Etsy and Shopify.
However, shares of eBay have quietly outperformed the broad market over the last five years, and that trend has continued in 2021. Year to date, the stock is up 19% as of this writing, beating the S&P 500 return of 10%.
There are three things that stand out from eBay's first-quarter earnings report that explain why its stock has outperformed and why it may continue to do so.
1. Improved volume growth
Before the pandemic, eBay posted a 5% decline in gross merchandise volume (GMV) in 2019. Given that weak showing, it's understandable the stock sold for a relatively low forward price-to-earnings (P/E) ratio of 11 at the time.
But last year, GMV growth accelerated to as high as 26% in the second quarter. That number decelerated in the second half of the year before picking back up in the latest report with a growth rate of 29%.
eBay expects to report lower growth in the current period as it laps a strong showing in the year-ago quarter, but it is still impressive that management expects to report revenue growth between 12% to 14% year over year.
Now, eBay trades for about 16 times forward earnings estimates, which is a bargain if eBay can sustain its recent volume gains beyond the pandemic.
There are a few reasons it can.
2. New category expansion
Management has been investing in new product categories that are already driving high volume growth.
eBay's recent expansion into authenticated sneakers and luxury watches has been very successful. In the first quarter, sales of sneakers valued above $100 grew at a triple-digit rate for the second quarter in a row.
"In luxury watches, we saw growth accelerate from 16% in Q4 to 38% in Q1 in the U.S.," CEO Jamie Iannone said during the first-quarter earnings call.
The market for secondhand luxury goods and sneakers has been hot in recent years. For example, StockX is a popular marketplace to buy and sell authenticated sneakers, which recently saw its valuation jump 35% from December to $3.8 billion.
All said, eBay's marketing capabilities and early success in these markets could go a long way toward revitalizing its brand image with younger shoppers.
3. Selling non-core businesses
Investors might also be overlooking the tremendous value eBay is unlocking by selling off non-core businesses.
In Feb. 2020, eBay completed the sale of StubHub for $4.05 billion in cash. Management took those proceeds and repurchased nearly the same amount of shares in the first quarter of 2020.
The company is currently in the process of selling its Classifieds business to Adevinta for a combination of stock and cash worth $12.7 billion. eBay is also exploring options for its Korean online marketplace, Gmarket, which it acquired in 2009 for $1.2 billion.
It also holds a warrant to acquire up to 5% of leading payment platform Adyen at a specified date. At the end of the first quarter, this warrant was worth $1 billion, representing an increase in value of $700 million since eBay acquired it in 2018.
Regarding the deals with Adevinta and Adyen, Iannone said: "We remain excited about both of these investments, the optionality they provide, and the significant value each can generate for our shareholders."
Investors are underestimating eBay
eBay could run into some problems in the near term as it laps the growth from 2020, but the stock's low valuation may already account for that scenario.
Analysts currently expect eBay to grow earnings per share at a compounded annual rate of 10% over the long term. With the asset sales, category expansion, and improved GMV growth, the stock has a lot to offer at a forward P/E of less than 16. It even pays a dividend yielding 1.2%.
Overall, adding shares of eBay to your portfolio can serve as a good hedge for someone looking to diversify against high-P/E growth stocks that have fallen out of favor in 2021.