E-commerce and auction site eBay (EBAY 1.32%) is on fire in 2021. The company gained a record number of customers at the pandemic's onset as people avoided shopping in person.
eBay is using this momentum to optimize business performance. Management expects many of the buyers who signed up during the pandemic not to stick around long term, so it's focusing on retaining high-value customers. That's one of a few things investors should know about eBay as the stock races higher.
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Making the most of it
At the pandemic's onset in eBay's second quarter of 2020, the company added seven million active buyers, the most in ever in the company's history. eBay continued to add buyers throughout the next year, but that trend reversed itself in the most recent quarter. Economic reopenings have led consumers to spend more time away from home. Unsurprisingly, fewer shoppers turned to eBay, and as a result, the company shed seven million active buyers between the first and second quarters of 2021.
Still, at 159 million strong, active buyers are up 3% from the same quarter in 2019. Moreover, eBay has made some changes in its promotional activity to target higher-value customers, so while the total count is shrinking, the quality of buyers has improved. Here is what management said on the matter in the latest earnings call:
In parallel, we've discontinued legacy tactics that led to low-value, infrequent, or one-and-done buyers. Our buyer base is starting to evolve based on this strategy. These high-volume buyers are growing compared to a year ago, and their spend on eBay is growing even faster. This higher-quality mix of buyers increases value for sellers and will lead to improved health of our ecosystem over the long term.
Indeed, even though eBay lost overall active buyers quarter over quarter and year over year, it gained high-value buyers who also increased their spending during the period. These VIP customers make up 20% of eBay's buyer total but account for 75% of total purchase value. That is in stark contrast to low-value buyers who make up half of the total but contribute only 5% of gross merchandise volume. This new focus will be crucial for the company, because it generates revenue by taking a percentage (the take rate) of the overall transaction volume on its platform.
eBay has also migrated its buyers and sellers to its own payment system. The transition helps streamline the selling process and reduces the delay when buyers make a purchase and pay.
The combination of reduced promotional activity and payment migration increased eBay's take rate to 11.3% in the second quarter, up from 9.2% in the year-ago period.
What this could mean for investors
These latest changes can improve long-term profitability for eBay, boosting what has already been an excellent operating margin over the last decade.
Data by YCharts.
The market seems impressed as eBay shares have gained 45% so far this year. Management is confident enough in its prospects to increase its stock buyback target for this year from $2 billion to $5 billion. Savvy investors should take notice and put eBay on their list of stocks to watch.
