Source: PaxForex Premium Analytics Portal, Fundamental Insight
eBay is still working to provide favorable ground. The online retailer recently reported another quarter of weakening growth numbers as e-commerce slows after a surge in demand in 2021. In addition, management predicts further declines in 2022.
However, the company has some good news for investors, including growing volume in several key niches, as well as solid cash flow. These positives suggest that the company could return to a more normal pace of sales and profits by 2023.
Let's look into that.
eBay's business is shrinking at an accelerated pace. Its buyer pool is down 13% from a 9% decline in the previous quarter. Sales volumes on its platform are falling even faster, down 20% in the first quarter, compared with a 10% drop in each of the last two quarters.
Not surprisingly, fewer people are doing business through eBay's platform compared to early 2021, when all purchases were made online. And executives were happy to point out that the drop in demand was a little better than expected.
Non-GAAP profit margins were also surprisingly strong, though down from last year. "Our team delivered another strong quarter that exceeded our expectations," CEO Jamie Iannone said in a press release.
Growth in eBay sales was driven by relatively new areas -- payments and advertising. Several niche marketplaces also performed well, including the high-end watch category, the sneaker platform, and the eBay refurbished consumer electronics category.
These segments represent a competitive advantage for the company because it is difficult for e-commerce competitors to duplicate these marketplaces. The main challenge for eBay is to extend this advantage to other parts of the business.
eBay's financial performance continued to be impressive, even though earnings were down from a year ago. Free cash flow was $546 million, or 22 percent of sales. eBay's non-GAAP operating profit margin was about 32% of sales, much higher than that of vertically integrated competitors such as Walmart. eBay used the money to buy back its stock after prioritizing investments in growth initiatives.
Management has lowered its 2022 forecast slightly, in part because of the suspension of operations in Russia. Organic sales should now be down 3% to 6%, not up 3%. Non-GAAP earnings are now expected to be in the range of $3.90 to $4.11 per share, down from the previous forecast of $4.20 to $4.40 per share.
This decline took some investors by surprise, so the stock fell in the wake of the announcement. The stock is unlikely to start outperforming the market again until eBay demonstrates that the buyer pool and sales volumes are no longer waning.
As long as the price is below the 50.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 46.05
- Take Profit 1: 43.00
- Take Profit 2: 40.00
If the level of 50.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 50.00
- Take Profit 1: 54.00
- Take Profit 2: 60.00