Don't Discount EBay Stock Just Yet

  • Google's traffic may be on the way back for EBay. Since the loss is already priced into the stock, more Google traffic would definitely surprise on revenue figures
  • The data breach in 2014 has resulted in many users vacating the site. If some of these users return, they will be counted as new users which always is bullish on the street
  • EBay Plus seems to be a direct response to Amazon's prime program. EBay are testing it in Germany. If successful, expect to see a rollout fairly rapidly.
eBay Stock is headed higher article image

Investors are always on the look out for value plays and at the present moment in time eBay (NASDAQ:EBAY) seems to fit the bill. This eBay stock still hasn't recovered from its spin off of Paypal (NASDAQ:PYPL) with the share price now hovering around the $26 level. I just feel the coverage on this stock has been too bearish, on the whole, recently. EBay's woes have corresponded with hugely impressive recent numbers from Amazon (NASDAQ:AMZN) which seems to have alienated both eBay shareholders and users alike.

The main problem EBay is currently facing is its slowing revenue growth. Revenue rose to $4.4 billion in Q2 2015 missing analysts estimates of $4.49 billion. In defence of EBay here, revenues were adversely impacted by a 5% headwind due to the strong dollar, which is not sustainable in my view. Nevertheless, EBay is having a lot of problems with its marketplaces business which is the most important division in the company's make up. Revenue for this division declined to $2.1 billion which was a 3% drop YoY. This trend is not new as the chart below shows.
ebay
Despite the other divisions EBay has in its set-up, one would feel that the marketplaces division will need to turn around convincingly for this company to return to former heights.

First of all, Google came out with the Panda 4.0 update in May 2014 which affected EBay's results on the search engine in a negative way. Management of EBay came out last year and said the Google algorithm changes cost the company $200 million in revenue which is probably much higher by now. That was when things started to go wrong for the company. Gross merchandise volume (GMV) slowed last year to a 2%, down from 13% in 2013.

This is what happens when many of a company's long-tail keywords no longer show up on the biggest search engine in the world. However, SEO experts believe EBay can still re-optimize its site so its results can appear higher on Google's search engine. EBay has been working around the clock to optimize its sites since last year and work is starting to bear fruit. Recently Mark May of Citi Research released a report and stated that Google's traffic to EBay had begun to turn positive again since June of this year. If the trend continues, expectations for the second half of the year should be positive.

Investors should remember that the share price at these levels reflects the loss in revenue due to Google's former search results priced in. Furthermore, the work that EBay has done will definitely stand it in good stead going forward as it should have learnt to stop producing low quality websites with huge repetition. Its focus now is to be the most unique (in terms of listings) large cap ecommerce site out there, which should benefit when it regains its previous ranking in the search results. Furthermore, if Google comes out with another Panda update, I just think EBay has a leg up here on its competition because it has been through the mill. Watch marketplace sales in the next few quarters. If we get a pleasant hike, Google traffic will probably be one of the prime reasons.

Another event that adversely affected the stock last year was the security breach which meant that former users had to reset their passwords in order to login once more. This data breach resulted in loss of many users which hit the stock negatively. Again, I feel this event has been fully priced into the eBay stock price so I can only see positive user growth from here. Investors should remember that users returning to EBay will be treated as new users by the street. We have seen with companies such as Facebook (NASDAQ:FB) how the street treats companies with a growing user base. Expect to see EBay's user number rise in the forthcoming quarters which will bolster the eBay Stock price into the $30's once more.

The main advantage this company has are the strong fundamentals of the industry it operates in. EBay bears point to future domination by companies such as Google (NASDAQ:GOOG) and Amazon in this space, but I don't see it. EBay (and the entire e-commerce sector) also competes with offline merchants such as Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT). Ecommerce is only going to grow from here (expected to increase by $500 billion by 2018) and companies like EBay are poised to take advantage.
global-e-commerce-sales-sales_chartbuilder
So as an investor, would you prefer to invest in a well run established successful offline merchant with thousands of stores like a Walmart in a declining sector or a struggling EBay trying to find its feet in a growth sector. You can clearly see this growth trend with a new initiative in Germany called "eBay Plus".

Thousands of users have signed up ($22 fee per year) to avail of express shipping and free returns on millions of listings. Sellers get compensated through lower listing fees and through having better product placement on the platform. Since EBay doesn't stock its products, it needs to compensate sellers to ensure buyers get products faster. This move seems to be a direct response to Amazon's Prime program where members receive similar benefits. It will be interesting to see how this experiment goes but one thing is for sure - the demand is there.

This stock's P/E ratio is now at 10.83. The risk/reward trade here has to be to the upside from these levels.

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