eBay (EBAY 1.21%) was one of the prime beneficiaries at the onset of the pandemic. Folks looked to the e-commerce retailer and auction site for goods they needed and wanted while avoiding shopping in person.
The trend is reversing for eBay as economies are reopening worldwide. With that backdrop, the company is scheduled to report fourth-quarter earnings on Wednesday, Feb. 23. While long-term investors generally don't buy or sell a stock based on short-term events, there are some who use earnings reports as markers for whether or not to add to their holdings or as clues for potential discount opportunities. With that in mind, let's see if investors should buy this retailer's stock before the report's release.
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eBay is taking a larger share of each transaction
eBay doesn't own or sell the products on its platform. Instead, it creates and manages the platform that brings together buyers and sellers. To generate revenue, eBay collects a varying fee from every transaction on the platform.
Arguably, buyers and sellers are equally crucial to eBay's success. Buyers would stop visiting the site if there weren't attractive items to buy. In contrast, sellers would stop going through the trouble of listing items if there weren't many willing buyers.
The coronavirus pandemic brought millions of new buyers to eBay. From Q2 2020 to Q1 2021, eBay's total active buyers increased from 161 million to 166 million. That said, eBay is now shedding active buyers as economies reopen and shoppers again have alternatives.
Further, management implemented a new strategy of reduced marketing and promotions aimed at lower-value buyers. The two forces acting together have caused active buyers to fall from the peak of 166 million to 154 million at the end of Q3.
Fewer buyers could be one of the main reasons gross merchandise value (total value of sales) has fallen by over 12% year over year to $19.4 billion. The metric is vital because eBay derives its revenue by taking a percentage of this value as its fee. Still, eBay increased its revenue year over year, despite falling gross merchandise value.
How did it accomplish this feat? By raising the percentage it takes from each transaction. eBay's transaction take rate has increased from 9.2% in Q2 2020 to 12.1% in Q3 2021.
You might assume that sellers aren't too thrilled about the increased levy. However, you couldn't tell by the number of sellers on eBay's platform, which remained flat at 19 million over the last year.
Beefing up services
Perhaps sellers are pleased with how eBay offers more value for the increased fees. In recent quarters, eBay has been beefing up its services to induce more transactions. One of the primary friction points on eBay's platform is trust between buyers and sellers, and that's precisely where management has focused on increased investments.
In the latest of these initiatives, eBay announced on Jan. 25 it would offer an authentication service for trading cards over $750 listed on eBay. Consumers can now shop with peace of mind, knowing that eBay will authenticate these cards to ensure they're not fakes and are delivered as advertised.
Trading cards are a significant category on eBay, accounting for $2 billion in gross merchandise value in the first half of 2021. Authentication for trading cards comes in addition to expensive handbags, sneakers, and watches.
Is eBay stock a buy?
eBay stock is trading at a price-to-free-cash-flow ratio of 15.7 and a forward price-to-earnings ratio of 13.2. These prices are roughly what it has sold for, on average, in the last five years. The company may continue to experience headwinds in the near term as the stay-at-home trend reverses.
However, in the longer run, an increasing share of shopping is moving online. Further, eBay is now taking a larger share of each transaction and reinvesting some of the increases, beefing up its services. eBay may not be an explosive growth stock, but it offers investors good value at its current price. The stock is likely worth buying before or after the upcoming earnings report, especially if you are planning to buy and hold long enough to benefit from the company's growth over time.
