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3 Surprises in eBay's Third-Quarter Earnings Report

By Demitri Kalogeropoulos – Nov 4, 2021 at 8:35AM

Key Points

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The marketplace is still growing sales even as merchandise volumes decline.

eBay (EBAY 0.47%) is going through a growth slowdown. Sales volumes are down, and the buyer base is declining from the record surge the marketplace saw in the second half of 2020, the company revealed last week in its third-quarter earnings report.

That slump is pressuring earnings, which are down over 50% in each of the last two quarters. But eBay still had plenty of good news to report in its Q3 announcement. Let's look at three surprisingly positive trends for the business heading into the key holiday shopping season.

Person with credit card and laptop.

Image source: Getty Images.

1. Revenue rose 11% year over year

eBay managed to boost revenue at a double-digit percentage rate, even though sales volumes plunged 21% compared to the pandemic-boosted Q3 a year ago. The revenue spike also occurred despite a 5% drop in the pool of active buyers.

eBay offset those declines with strength in its growing payments and advertising segments. Success in these niches helped the company beat its sales targets for a second straight quarter. Back in August, management had predicted organic revenue gains of between 8% and 10%.

2. The 12% take rate

eBay's widening portfolio of services for sellers is helping it charge much more in transaction fees. That "take rate" rose to 12% of sales compared to 10% a year ago and 11% in the fiscal second quarter. The marketplace only suffered a modest profitability decline as a result, with non-GAAP operating margin dropping to 32% of sales from 34% a year ago.

After adjusting for the falling merchandise volumes, profit margin would have risen, year over year. "Our team delivered another strong quarter," CEO Jamie Iannone said in a press release, "once again meeting or surpassing our expectations for all key business metrics."

3. Outlook on cash returns improves

Most investors' attention was focused on eBay's holiday quarter outlook that calls for another significant growth slowdown. Organic sales gains will land between 3% and 5%, executives predict, compared to 10% in the previous quarter. The forecast implies that merchandise volume will fall in a low-teens percentage range while still rising, as compared to 2019 before the pandemic scrambled demand trends.

There's a clearly improving picture on cash returns, too. eBay is now expecting to spend $7 billion on share buybacks this year, up from the $5 billion it targeted a quarter back and the $2 billion it forecast at the start of 2021.

Those upgrades are in part aimed at helping signal to Wall Street that management is bullish about the business. "I think the eBay franchise is pretty misunderstood," CFO Steve Priest said in a conference call with analysts. "One of the things that we need to do a better job [at] is really ensuring that the investor community understand a little better," he explained. The rising buyback is part of that focus.

More surprises ahead

eBay's short-term outlook implies more of a soft landing for the business as rising payments and advertising sales offset declining merchandise volumes compared to late 2020. Investor returns will also be amplified by those stock buybacks.

But there could be bigger surprises ahead when the company holds its annual investor event in early 2022. That announcement will include updates to eBay's longer-term goals now that pandemic demand trends have stabilized. eBay's sales offerings, its cash flow, and its profitability metrics all imply management will be ambitious in describing the platform's new financial outlook early next year.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends eBay and recommends the following options: short October 2021 $70 calls on eBay. The Motley Fool has a disclosure policy.

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