eBay (EBAY +0.98%) stock slid immediately following the release of its third-quarter earnings results on Oct. 27, despite posting strong revenue and earnings numbers. Weak revenue guidance came under the spotlight as ongoing reopenings reversed some of the temporary sales gains during the pandemic.
However, during the height of the COVID-19 crisis, new leadership made changes that could improve eBay's long-term prospects. The question for investors is whether the latest numbers point to continued stagnation or offer a path to additional growth for the internet marketplace.
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Slowing growth spooks investors
Admittedly, the quarter painted a mixed picture. Gross merchandise volume (GMV) fell 10% year over year to $19.5 billion as selling activity fell from the unusually high levels in 2020. Nonetheless, eBay now retains a higher percentage of that transaction volume as revenue, which grew 11% to $2.5 billion.
Unfortunately, this top-line growth wasn't enough to drive profits higher as earnings per share fell 50% year over year to $0.43. Adjusted earnings, which exclude the effect of a fair market value adjustment for the company's Adevinta business, were up 9% to $0.90 per share. Free cash flow also fell slightly, down 4% to $502 million for the quarter.
For the current period, management is guiding for revenue growth of just 3% to 5%. This slowdown helped push shares down as much as 9% the day of the earnings release, but the stock has since mostly recovered. Year to date, eBay is still up over 50%.
Data by YCharts.
Why eBay still has room to run
A key factor investors should consider is the change in the company's direction under CEO Jamie Iannone. Previously an eBay executive, Iannone returned to the company after spearheading e-commerce sales at Walmart. Revenue was surging when he took the job in April 2020 as lockdowns drove consumers to shop online. Now, with sales slowing as economies reopen, the new environment is putting Iannone's vision to the test.
Still, in the last 18 months, Iannone has made significant changes to revive the e-commerce company and address formidable challenges from Amazon, rising e-commerce players such as Etsy, and other platforms such as Facebook Marketplace.
Under Iannone's direction, eBay reduced the steps required to list items on the site, rolling out a new listing tool to streamline this process. The company also enabled eBay storefronts on mobile devices and QR coding to make pickups faster. Additionally, the company added a managed payments system, a move that should give sellers and customers a digital wallet experience.
eBay is also targeting higher-end customers. With this change, the number of active buyers on the site fell 5% year over year to 154 million. However, more than half of this user base is what the company describes as "low-value buyers," a group making up only 5% of GMV. Iannone said on the third-quarter earnings call that since 2019, the number of high-value buyers has risen 6% amid falling buyer numbers overall.
One way it has appealed to these important customers is by launching Promoted Listings Advanced Beta. This builds on its established Promoted Listings platform, allowing top-rated sellers to bid for the top slot in a given search. Revenue for promoted listings increased 9% year over year, and such moves should attract the type of sellers that will draw higher GMV and revenue over time.
With the worst of the pandemic behind us, the company is leaning into important changes that should make it more competitive long term. A better user experience and more engaged shoppers, among other efforts, are encouraging signs of what a reinvigorated eBay can look like.
