eBay (EBAY 5.28%) seems to be having a rough time adjusting to changing consumer behavior. Sales boomed for the online auction and e-commerce business as billions of people looked to avoid shopping in person during the early days of the pandemic. Now that vaccinations against COVID-19 have gained momentum and governments have eased business restrictions, people are prioritizing away-from-home activities they missed out on.
Unfortunately, that's been a headwind for eBay. As a result, the stock is down nearly 40% off its all-time high in 2021. That said, the market pessimism could be an excellent opportunity for long-term investors to buy shares of eBay.
NASDAQ: EBAY
Key Data Points
eBay runs a profitable business
One of my favorite aspects of eBay is its asset-lite business model. It does not own any of the inventory for sale on its platform. Instead, it focuses on bringing buyers and sellers together to transact. eBay earns its revenue by taking a percentage of those aforementioned transactions. One other critical thing eBay does not do is fulfillment. It leaves shipping and handling up to buyers and sellers, avoiding a capital-intensive service altogether.
EBAY Operating Margin (Annual) data by YCharts
As noted in the chart above, by dodging expensive and risky endeavors, eBay has grown its operating profit margin from 20.25% in 2012 to 28.05% in 2021. eBay's revenue and earnings have been more volatile over that same time due to acquisitions and divestitures. Still, eBay has demonstrated skill in those corporate maneuvers as earnings per share have increased at a compound annual rate of 23.6% in the last decade.
In the near term, eBay has two significant themes playing out. The economic reopening is taking shoppers away from its platform and into brick-and-mortar stores. Gross merchandise value, which measures the total value of transactions on eBay's platform, has fallen for five consecutive quarters after peaking in the first quarter of 2021. This trend is primarily to blame for eBay's stock falling 40% off its high.
The second significant development at eBay is its concerted effort to raise transaction fees, or the percentage it takes from all sales on the platform. That metric has risen from 10.3% in the first quarter of 2021 to 12.4% in the second quarter of 2022. On average, eBay is taking an incremental $2 million in fees on every $100 million in sales on the platform. Overall, eBay earned $2.3 billion in fees on gross merchandise sales of $18.5 billion in its quarter ended in June. Still, it has room to increase the take rate higher, as one of its rivals, Etsy (ETSY 1.09%), earned a rate of 19.3% in its most recent quarter.
Notably, the latter development is good news for investors from a financial standpoint. But the more recent shift to brick-and-mortar stores shouldn't make eBay investors flee, as the long-run trend is in favor of more shopping happening online. According to Statista, the percentage of online shopping in the U.S. is forecast to increase to 22% in 2025 from 14% in 2020.
eBay's stock is arguably cheap
EBAY PS Ratio data by YCharts
Meanwhile, the market's reaction to eBay's short-term headwind has its stock price down near the lowest levels its been at in the last five years. The price to sales ratio of 2.9 is less than half its peak of over 6. Investors buying now would be paying less than half per dollar of sales that eBay delivers compared to its peak. It might be a good idea for long-term investors to buy eBay stock now, while the broader market's pessimism remains and before the stock pops back up to its regular levels.
