eBay (NASDAQ:EBAY) stock has been delivering lackluster performance for investors lately -- shares of the e-commerce platform operator are down nearly 10% year-to-date as a result of disappointing growth in 2015 and modest expectations for this year. The company is scheduled to report first quarter earnings on Tuesday, April 26, and investors should keep a close eye on key variables, including user growth, revenue, and profit margins.
Key operating metrics
It all starts with users and their activity levels. If eBay is going to deliver growing sales and strong profitability for investors, then the company needs to focus on its user base and keep those users actively engaged in the platform.
As of the end of 2015, eBay had 162 million active users, which represents an annual increase of 5%, or eight million new users. Total gross merchandise volume, meaning the dollar value of merchandise sold through the marketplace, was $82 billion during the year, which represents a decrease of 1% in U.S. dollars and a 5% increase in constant currency terms. Ideally, investors would like to see gross merchandise volume growing at a faster rate than the user count, as this would signal increasing engagement per user.
Management fully acknowledges that eBay needs to do better in this area, and the company is implementing a series of initiatives to improve the user experience and jump-start growth. For example, the company is making product data more structured in order to generate more traffic from search engines, as well as building better catalogs to increase product discoverability and provide more relevant information to buyers.
The top line
It's hard to overstate how important revenue growth can be for a company like eBay. The e-commerce industry offers exciting potential for expansion over the long-term -- e-commerce made up just 7.5% of total retail sales during the fourth quarter of 2015 -- so eBay has significant room for improvement if management can lead the company in the right direction and accelerate top line growth.
Total revenue during the fourth quarter of 2015 was $2.3 billion, flat versus the year-ago period, while constant currency sales increased by a modest 5% year-over-year. For the first quarter of 2016, management is expecting revenue to be in the range of $2.05 billion to $2.10 billion, which would represent an increase of 3% to 5% on a constant currency basis.
eBay comes well behind Amazon in terms of both revenue size and growth. Amazon produced $35.7 billion in sales during the fourth quarter of 2015, with sales increasing by a vigorous 22% in U.S. dollars and by an even stronger 26% in constant currency terms during the period.
Margins and earnings
eBay, however, bests Amazon in one important area: profitability. While Amazon is mostly an online retailer, eBay operates as an e-commerce platform, meaning the company matches buyers and sellers of all kinds of products, and it makes a commission on each transaction. This business model has conveniently low reinvestment needs, and eBay doesn't need to worry about variables such as inventory risk or distribution costs.
eBay produced an impressive operating margin of around 26% of sales during full-year 2015. In addition, the business generated $2.9 billion in operating cash flow after discounting a modest $668 million in capital investments. This means free cash flow amounted to $2.2 billion during the year.
Management is anticipating adjusted earnings per share in the range of $0.43 to $0.45 in the coming earnings report, while GAAP earnings per diluted share are expected to be between $0.37 and $0.39. Wall Street analysts are currently expecting $0.45 in earnings per share, so forecasts fall at the top end of the company's guidance.
Earnings figures typically grab a lot of attention from the media, but considering the runway eBay has to accelerate growth, investors may want to focus a bigger share of their attention on the earnings drivers: users and revenue.
Andrés Cardenal owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.