eBay (EBAY +0.07%) is one of the prime beneficiaries of the shift to online shopping caused by the coronavirus pandemic. Since the onset, the company has experienced a surge of new customers, and the newly acquired customers are sticking around.
The acquisition of millions of new customers has improved eBay's long-run prospects, and investors are noticing. Indeed, its shares are up by 38% year to date. If you haven't already, it may be time to start accumulating shares of eBay stock before buyers bid up the price even more.
Image source: Getty Images.
Almost 200 million active buyers
Buyers are the key to eBay's business. Customers attract sellers who list more items on the platform. The increasing availability of items makes it more attractive for buyers and feeds the positive feedback loop. From the fourth quarter of 2019 to the first quarter of 2021, eBay acquired a net of 13 million active buyers. In all, eBay has 187 million active buyers.
To put that figure into context, Amazon (AMZN 2.61%) Prime has 200 million members. Admittedly, the comparison is not as straightforward as it seems. Amazon probably has more active buyers who are not Prime members. Still, the comparison highlights the scale of eBay's buyer totals.
Additional sources of revenue
Unsurprisingly, sellers covet access to the nearly 187 million buyers on eBay. Management is well underway in capitalizing on this demand. It's doing so by increasing the tools available for sellers to advertise on its platform. In 2020, advertising revenue was $1 billion. What's more, management is adding to the toolbox open to marketers, which could further boost ad revenue.
In a glimpse of the potential for this source of sales, in 2020, Amazon reported over $20 billion in ad revenue.
Importantly, ad revenue usually comes with higher profits than the business overall. It is mostly an automated process with low costs beyond the initial investment in the technology to develop capabilities.
An asset-light, profitable business model
Unlike Amazon, eBay does not own or operate expensive fulfillment facilities. Instead, it allows buyers and sellers to arrange shipping options themselves. eBay mainly brings the two together and ensures fairness in dealings. For its services, eBay takes a percentage of sales. In the most recent quarter, its take rate was 10%.
The model scales efficiently and has led to solid profits. Over the last decade, eBay's operating profit margin has averaged 23.9%. Compare that to Amazon's of 2.2% in the same time. On its strategy, CEO Jamie Iannone said this:
Our results to date are very encouraging. Our underlying growth is accelerating, sellers and buyers are growing, and we are making progress in our pursuit to be the best global marketplace to buy and sell. Simply put, our strategy is working.
Inexpensive valuation
Data source: YCharts
eBay is trading at a relatively inexpensive value at a forward price-to-earnings ratio of 17.62 compared to Amazon's 67.46. Certainly, Amazon's long-run prospects are more favorable, and it is addressing a much larger market size, but is that enough to justify a four-time valuation premium to eBay?
Regardless, eBay's favorable price, excellent profit margins, and solid prospects make it a good value for investors right now. eBay's management seems convinced of the stock's value and has committed to buying back $5 billion worth of shares in 2021.
