eBay's (EBAY -0.14%) stock price has surged 146% since the end of March 2020. The tragic situation of COVID-19 sent many people to trusted sources online to shop for goods, and eBay's e-commerce marketplace got a huge boost from that wave of traffic. Revenue growth accelerated from a decline of 2% year over year in the first quarter of 2020 to as high as 42% in Q1 2021.
Investors have sent the share prices up 47% in 2021 so far, compared to a 13.6% return from the broader market, as measured by the Nasdaq Composite index. Should you still consider investing in eBay at these levels?
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Recent performance
Valuation is always important to consider when evaluating a stock's potential upside. eBay trades at 19 times the consensus earnings estimate for 2021, which is below the S&P 500 average forward earnings multiple of 22. The stock could be marginally undervalued, depending on how much eBay continues to grow over the long term.
However, eBay is facing tougher year-over-year growth comparisons this year. In the second quarter, revenue grew 11% on a currency-neutral basis, which is down from 42% in the first quarter and 30% in the year-ago quarter. In the third quarter, management expects revenue to grow 6% to 8% on a currency-neutral basis over the year-ago quarter.
The stock price is up 7.1% since the earnings report on Aug. 11, but with growth decelerating, it's difficult to say whether the stock will continue to head higher in the near term. But eBay could reaccelerate its revenue growth in 2022, based on management's strategy to improve the marketplace business.
Pursuing the big spenders
CEO Jamie Iannone took over in April 2020 and has brought plenty of experience with him after working as chief operating officer of Walmart's e-commerce business. eBay is facing mounting pressure from new rivals, such as Etsy, which posted triple-digit revenue growth in 2020 and added 35.5 million new active buyers. That's more than triple eBay's active buyer increase of 11 million during 2020.
eBay has reported strong results from new categories in recent quarters, including authenticated sneakers, trading cards, and luxury watches. Trading cards, for example, generated $2 billion in gross merchandise volume (GMV) in the first half of the year, and Iannone sees "untapped potential" for further growth in the category.
Still, $2 billion of GMV is not much compared to eBay's total GMV of $22 billion in the last quarter, but there is more to the strategy with the recent category expansions. The goal here is to offer more in-demand items that appeal to young people, especially those Gen Z and millennials that like to shop frequently.
Before Iannone joined the company, eBay was focused on growing total active buyers with no consideration to the quality of its customers in terms of how engaged they are and how much they spend. The result was that active buyer growth was slowing to just 1% right before the pandemic in Q1 2020. Basically, Iannone wants to reduce dependency on what he refers to as "one and done buyers" and focus on bringing in "lifelong enthusiasts" to the marketplace to stimulate better growth, which is already showing promise.
For example, eBay has found that a Gen Z shopper will buy a $500 sneaker, but then spend another $2,000 in goods across other categories. Iannone explained as much during eBay's Q2 earnings call:
We're seeing [the] same thing in watches where a luxury watch buyer is buying $8,000 in categories outside of watches and that's over 50 items, and that's one of the benefits of eBay is that cross-category shopping nature, and that's really hard for other competitors to replicate.
While eBay's active buyer count declined sequentially by 7 million to 159 million in the quarter, that's still a wide customer reach and mirrors the broad selection of goods eBay has to offer as it pursues higher-value buyers.
"These high-volume buyers are growing compared to a year ago, and their spend on eBay is growing even faster," Iannone said. "This higher-quality mix of buyers increases value for sellers and will lead to improved health of our ecosystem over the long term."
EBAY data by YCharts
Don't count eBay out
If eBay can bring in more high-volume buyers to the marketplace, that would attract more sellers. This, in turn, would lead to greater merchandise selection, which would also help attract more buyers and create a flywheel of growth.
Iannone has breathed new life into eBay, which I believe makes the stock worth considering even after the gains over the last year. There are faster-growing online retail stocks, but eBay is not going away. It generates healthy levels of free cash flow that it is returning to shareholders through share repurchases and dividends. eBay's free cash flow amounted to $2.9 billion over the last year, which is a high margin of 29% compared to total revenue of $10 billion.
It is not too late to invest in eBay. If management continues to succeed at bringing in younger shoppers, the stock could deliver market-beating gains from here.
