eBay's (EBAY +3.42%) business is thriving during the pandemic. Millions of folks look to the e-commerce auction and shopping site for a wide assortment of goods that includes everything from diapers to trading cards. And over the past 18 months or so, because it operates exclusively online, some of its customers have greatly appreciated that they can shop at eBay in a way that helps them avoid exposure to COVID-19.
Investors have noticed eBay's performance of late and the stock price is up over 53% year to date. Still, it's not too late for investors considering this stock.
What follows are three reasons to consider buying eBay stock right now.
Image source: Getty Images.
1. eBay has an asset-lite business model that scales efficiently
In contrast to Amazon (AMZN +1.29%), eBay does not operate fulfillment centers. It also leaves the responsibility for shipping and handling to the buyers and sellers to work out themselves. This business model essentially makes eBay a middleman, creating a marketplace that brings buyers and sellers together to transact. For its services, eBay collects a small commission on each transaction.
The business model is proving to be lucrative, with operating profit margins holding above 20% every year for the previous decade. That's also in contrast to Amazon, which has not managed to produce a single year of operating profit margins above 10% over the last decade. Even during the pandemic boom, Amazon's operating profit margin only hit 5.9%.
The caveat here is that Amazon earned that margin on nearly $400 billion in annual sales, whereas eBay's annual revenue was slightly over $10 billion. Still, it highlights that eBay is more nimble and efficient in its business and is earning a higher profit margin.
2. eBay is increasing the take rate on transactions
The fee (take rate) eBay earns for bringing buyers and sellers together has been increasing. From Q2 2020 to Q2 2021, eBay raised what it collects from transactions by over 200 basis points, from 9.2% to 11.3%. This is a result of migrating sellers to internal payment systems and nudging sellers to promote their listings (which eBay also facilitates for a fee).
The migration to the new fee model is four-fifths of the way completed, so there is a little more room for the shift to boost the take rate. And once shifted over, buyers and sellers are likely to use these payment methods longer-term. In other words, this is not some short-term boost that could later reverse.
3. eBay's stock price is reasonable right now
Even though eBay stock price is up 50% this year, the forward price-to-earnings (P/E) ratio on the stock is still reasonable. Trading at a forward P/E of 20, the stock is not expensive, considering that the company is such an excellent performer in terms of operating profits.
The stock will be further supported in the near term with the company's heavy stock buyback program. Overall, eBay management has over $7 billion in authorization for buybacks from the board of directors.
Importantly, when a company is buying back its own stock, it reduces the supply in the market, which can help lift prices higher. Furthermore, reducing the number of shares outstanding means that profits are split among fewer shares, which increases earnings per share (if all else is held constant).
Buying eBay stock is not going to make you a millionaire overnight. Still, the asset-lite business model, the high profit margins, and the favorable valuation will likely work together to increase your portfolio's wealth over the long term.
