Sales surged for eBay (EBAY 1.60%) in the early months of the pandemic. Folks were looking for ways to get the things they wanted without going to brick-and-mortar stores where they could be exposed to a potentially deadly virus.
Thankfully, several effective vaccines and treatments against COVID-19 have been developed and administered worldwide. And while the pandemic is far from over, people feel more comfortable leaving their homes and shopping in person. The turnaround has been a headwind for eBay, which is seeing spending on its marketplace fall.
Revenue falls slower than GMV for eBay
In its first quarter, which ended March 31, eBay reported that gross merchandise value (GMV) decreased 17% year over year. GMV measures the total dollars spent on eBay's platform, and it's a crucial metric since eBay takes a percentage of those sales as revenue. Note that eBay does not own the inventory sold on its platform, so it relies on transaction fees from bringing buyers and sellers together.
Fortunately, eBay's revenue only fell 5% year over year. The smaller revenue decrease can be attributed to eBay raising the fees it charges sellers. Its transaction take rate has steadily increased for several quarters, culminating at 12.1% in the latest quarter, up from 10.3% in the prior-year period. While shareholders may be pleased to see eBay capturing more of each transaction as revenue, these fee increases may not be sustainable. Undoubtedly, sellers on eBay's platform are not happy about paying higher fees just as buyer spending is falling.
Alternatively, sellers may pass along the higher fees to their customers by raising prices on their products, making the platform overall less attractive when compared to competing e-commerce destinations. Either way, the result would not be good for eBay. For that reason, GMV is vital to the business. Increasing GMV will attract more sellers who want to capitalize on the volume of activity on eBay's marketplace. The rise in sellers will boost selection for buyers, attracting even more shoppers.
Exacerbating the decline in GMV, eBay has reduced spending on marketing in recent quarters. As a percentage of revenue, sales and marketing decreased to 18.6% in the first quarter, down from 19.9% in the same quarter last year. Users accustomed to offers like $15 off a purchase of $75 or more saw those promotions less frequently, if at all.
Even then, the company saw its adjusted operating margin decline nearly five full percentage points to 32.4% in the first quarter.
eBay stock is not expensive
The faster-than-expected slowdown in spending had eBay lower its revenue target for the rest of 2022. It now expects revenue between $9.6 billion and $9.9 billion. This is down from the previous guidance of revenue between $10.3 billion and $10.5 billion. Unsurprisingly, the lower revenue expectation decreased adjusted earnings expectations to $4.00 at the midpoint, down from the previous midpoint of $4.30.
The stock was down 11.7% the day following the earnings announcement. That sell-off now has eBay trading at an attractive price-to-free-cash-flow ratio of 14.4. Revenue could face continued headwinds as consumer behavior returns closer to pre-pandemic habits. Still, eBay has done an excellent job boosting earnings per share despite slow revenue growth for many years.