Macroeconomic Headwinds And UK Fee Rollouts Will Hurt Margins

Key Takeaways

• Macroeconomic challenges in key markets and external dependencies like partnerships may constrain eBay's global revenue and earnings growth.
  
• New fee structures and initiatives may not quickly counteract changes in consumer-to-consumer value, potentially compressing margins.
  
• eBay's focus on AI innovation, strategic partnerships, and geographical expansion could enhance growth in GMV, revenue, and buyer-seller experiences.

Catalysts

Operates marketplace platforms that connect buyers and sellers in the United States, the United Kingdom, China, Germany, and internationally.

• Despite projections for growth in focused categories and AI enhancements, eBay faces challenges from macroeconomic headwinds in the U.K. and Germany, suggesting a potential hinderance to global revenue growth.
  
• The rollout of buyer protection fees and managed shipping in the U.K. may not offset the C2C value proposition changes quickly enough, negatively impacting take rates and thus compressing net margins.
  
• While optimistic about focus categories, the cautious guidance for flat to 1% GMV growth in the near term indicates limited upside for revenue despite the ongoing initiatives and innovations.
  
• There is uncertainty around U.S. tariff changes and its potential impact on GMV, especially given that changes could affect profitability if not managed well, hindering operating margins.
  
• Continued macro uncertainties and the reliance on new partnerships like Klarna and Facebook to drive GMV growth signal reliance on external factors, which could impact revenue and earnings growth if these partnerships do not deliver the expected results.

eBay Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on eBay compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming eBay's revenue will grow by 1.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 19.3% today to 16.7% in 3 years time.
• The bearish analysts expect earnings to reach $1.8 billion (and earnings per share of $3.86) by about April 2028, down from $2.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, down from 15.7x today. This future PE is greater than the current PE for the US Multiline Retail industry at 15.0x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.11%, as per the Simply Wall St company report.

eBay Future Earnings Per Share Growth

Risks

• eBay demonstrated robust growth in its Gross Merchandise Volume (GMV), achieving a 5% increase in focused categories and a stabilization in core categories. This positive trend could enhance revenue and earnings if sustained.
  
• The company has made transformative innovations, particularly with AI-driven tools like magical listings and automated social media posting, enhancing seller and buyer experiences. This could result in greater efficiency, leading to potential improvements in net margins.
  
• Through strategic geographical expansions and partnerships, such as with trading card companies and motors parts and accessories, eBay is tapping into new opportunities, potentially increasing GMV and thereby impacting revenue positively.
  
• eBay is taking significant steps in financial services, partnering with Klarna to provide buy-now-pay-later solutions across European regions. This move has shown higher average order values, which could boost overall GMV and earnings growth.
  
• There is a committed strategy to enhance experiences both in focus categories and geographical areas like the U.K., Germany, and through partnerships with platforms like Facebook, aimed at driving awareness and potentially expanding revenue and earnings through wider reach and increased marketplace activities.

Valuation

• The assumed bearish price target for eBay is $56.46, which represents one standard deviation below the consensus price target of $64.54. This valuation is based on what can be assumed as the expectations of eBay's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $80.0, and the most bearish reporting a price target of just $49.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $10.6 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 8.1%.
• Given the current share price of $66.63, the bearish analyst price target of $56.46 is 18.0% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.