eBay (EBAY 2.77%) will be reporting earnings for the fourth quarter of 2015 on Wednesday, Jan. 27, and the coming earnings report could be remarkably important for investors in the company. Wall Street and the media tend to put a lot of attention on earnings-per-share numbers. However, investors may want to keep a close eye on the company's top line, as this could be much more relevant for eBay stock going forward.
eBay needs to jump-start growth
The e-commerce industry is one of the most promising sectors around. Online has gained a lot of ground versus bricks-and-mortar retail over the last several years, and it still represents only 7.4% of all retail transactions in the United States. So eBay is operating in a dynamic growth industry that still offers substantial room for expansion in the years ahead.
However, eBay comes well behind Amazon.com (AMZN 3.15%) in the industry, both in terms of size and growth. To put the numbers in perspective, Amazon is expected to make $107.3 billion in revenue during the full 2015, versus $8.6 billion in forecasted revenue for eBay over the same period. eBay is only 8% the size of Amazon in terms of sales, yet Amazon is expected to increase sales by nearly 20.5% in 2016, versus a forecasted revenue increase of less than 4.7% for eBay.
Amazon has reached tremendous scale, and that means big cost advantages in discount retail, as the company gets to negotiate conveniently low prices with suppliers. Amazon is also all about growth. The company is willing to sell its products for aggressively low prices to continue expanding rapidly, even if it comes at the expense of profit margins.
Many companies across the retail industry, both online and bricks-and-mortar, are feeling the competitive pressure from Amazon, and eBay is no exception.
eBay has a plan
eBay is implementing several initiatives to accelerate growth in the middle term. The company is working on strategies to better capitalize on the massive amounts of information it has about products and customers via big data technologies. According to management, eBay is finding interesting opportunities to leverage that information in areas such as search engine optimization, merchandising, deals, and sales.
In addition, the company is implementing more objective standards for sellers. This strategy is aimed at providing a more uniform experience to customers while helping small and medium-sized sellers to deliver what customers want, even if they don't have much experience on the platform.
eBay has also launched a new product for professional sellers called Seller Hub, which puts listing and marketing tools, along with deep data insights and selling recommendations, into one central place. The main idea is to build a more powerful and comprehensive tool for professional sellers to manage their end-to-end business on eBay.
Management knows that eBay needs to deliver a better experience to both buyers and sellers and improve product discoverability if it's going to recover some ground against Amazon. Recent initiatives are aiming in the right direction, but eBay needs to prove to investors that it can transform its good intentions into tangible results.
What you need to watch
Wall Street is typically obsessed with earnings-per-share numbers, and analysts are on average forecasting $0.50 per share from eBay in the December quarter. However, the company's ability to drive sustained sales growth could be a far more important driver for eBay stock going forward.
Management is expecting revenue to be in the range of $2.275 billion to $2.325 billion. That range represents a modest 3% to 5% year-over-year increase on a constant currency basis. Forward guidance could be as important as sales during the quarter, and investors would really appreciate some potential for acceleration in revenue growth over the middle term.
Users are the lifeblood of the business, and strong user growth could be a major positive for eBay. The company ended the third quarter of 2015 with 159 million active accounts, a 5% increase versus the same period in 2014. If user growth is gaining speed, eBay may be on the right track to delivering accelerating sales growth in the coming quarters.