eBay (EBAY -0.14%) was one of the prime beneficiaries of the coronavirus pandemic. Hundreds of millions of people worldwide were looking to avoid shopping inside stores and turned to online marketplaces like eBay to fill the void.
However, now that nearly 9 billion doses of COVID-19 vaccines have been administered and world economies are reopening by removing restrictions on businesses, eBay is shedding customers. Despite the customer losses, eBay's stock is up 29% year to date, but that does not ensure it will have similar success in 2022. Let's look at the business and determine if it's a smart buy for the new year.
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eBay is taking a more significant share of sales
In its second quarter of 2020, eBay had 161 million active buyers, which increased to 166 million by the first quarter of 2021. That's when economic reopening gained momentum, and eBay started losing buyers. As of its most recent quarter ended Sept. 30, eBay was down to 154 million active buyers.
Note, eBay does not sell its customers any items. Instead, it is a platform that allows buyers and sellers to transact together. eBay takes a percentage of each transaction, and that's primarily how it earns revenue. The value of those transactions (gross merchandise value) has unsurprisingly declined as eBay has lost millions of buyers over the last few quarters -- falling from $21.7 billion in the third quarter of 2020 to $19.4 billion in Q3 2021.
Still, eBay managed to increase revenue during that same time from $2.2 billion to $2.5 billion. eBay achieved this feat by increasing the percentage it takes from each sale. Overall, eBay's take rate increased from 9.7% in Q3 last year to 12.1% in Q3 this year. That can partly explain eBay's stock price rise in 2021 despite the lower buyer totals.
A higher take rate is a structural improvement that could increase its revenue-generating potential over the long term. For instance, if eBay's gross merchandise volume can rebound to the same level as last year, and you combine it with the higher take rate, eBay's revenue will be higher.
eBay's management made another strategic decision -- to focus on higher-value customers. For instance, eBay would formerly send me a coupon for 15% off my total purchase every quarter. The promotion sometimes enticed me to make a purchase. However, management has all but eliminated such practices. As a result, sales and marketing expenses fell to 18.8% in its most recent quarter, down from 22.3% last year. Interestingly, the reduction in promotions may be another cause for eBay's customer losses mentioned earlier.
Overall, eBay management has made moves that reduce the customer value proposition and favor its revenue and profits. There is already evidence of buyers reacting negatively and leaving the platform. It would not be surprising if, in response to eBay's higher take rate, sellers start leaving the platform as well.
eBay's focus on profit margins is attractive
The company has done an excellent job on profitability -- it averaged a pre-tax income margin of 28.3% in the last decade. Meanwhile, eBay is challenged on revenue, which grew at a compounded annual rate of 1.2% in that same time.
eBay has not done as well on innovation; the site is essentially the same in 2021 as it was in 2010. Listing an item for sale is still a slow and tedious process.
That being said, eBay's stock is not expensive, trading at a price-to-free cash flow ratio of 17. Consistent profits, an inexpensive valuation, and an asset-lite business model trounce the lack of innovation and make eBay a stock to buy for 2022.
