Maybe with the exception of the youngest generation, I’m tempted to say that everyone knows eBay. The online retailing dinosaur which was once declared dead due to explosively growing and more modern competitors, is still alive. In fact, it’s even the most profitable such platform. Not noticed by many, its stock has been climbing up to the second-highest point after the separation with PayPal. Time to look at eBay?

Summary and key takeaways from today’s Weekly
– eBay is one of the dinosaurs of online retailing. Despite not being a growth company, it is still well alive.
– Its stock has seen a strong uptrend since the separation with PayPal in mid-2015 – mainly due to aggressive buybacks. But its user base is crumbling.
– All in all this seems to be more a melting ice-cube at a premium price than a deep value bargain.

The famous third-party marketplace eBay (ISIN: US2786421030, Ticker: EBAY) was founded in 1995 when one or the other tech entrepreneur of today wasn’t even alive.

For people born in the 1980s or earlier, eBay is well known for its auctioning platform which established it early as one of the go-to places for online shopping.

While today auctioning has stepped strongly into the background, it’s nonetheless fair to say that eBay is one of the pioneers of online shopping. With time, it has lost its shine especially to amazon.com (ISIN: US0231351067, Ticker: AMZN), but also local online shops or specialized offerings for books, spirits or whatever one desires.

Today’s eBay is certainly not the same as almost thirty years ago and also in-between when it made one or the other acquisition.

It’s hard to deny, though, that eBay is still alive.

Taking out the separation with PayPal (ISIN: US70450Y1038, Ticker: PYPL) in 2015, eBay’s stock is even trading currently at its second highest point – the high was during the tech frenzy in 2021 when everything internet-related was propelled up, whether there was a serious business model behind it or not.

Nearly unnoticed by many and despite the common perception of being more a dying entity than a dominant player, the stock of eBay looks anything but dead. As a funny fact, it even outperformed PayPal by more than 50 percentage points since the separation in 2015. Speak of surprises!

With the momentum being upwards, the market doesn’t seem to expect it to be dying, either. eBay today is still the most profitable competitor in its space with its profitability numbers simply looking incredible.

While other high-flyers without a positive bottom line cratered into the dust, eBay’s stock is still climbing. It wasn’t even shaken by the short-lived market panic in early August 2024 which has hit especially big tech stocks pretty hard.

So what’s in store for eBay? Does the stock offer a contrarian opportunity to invest in an online retailer with proven profitability instead of only hopes for the future at a reasonable price?

Let’s find out.

My ideas on average are currently trailing the S&P500 and the Dow Jones. Nonetheless, I am seeing better risk and reward setups among my ideas for my members than I see in the indices.

Just to give you an example, yesterday, one of my Premium ideas shot up by more than 10% – despite dilution of old shareholders – because it secured financing for the urgently awaited market launch of a new treatment which already received tentative approval from the FDA.

As this is a rather small company and the case now de-risked through this move, there’s a significant opportunity for it to outperform the markets from here on by a wide margin.

Join me and my members on our journey to beat the markets!

^{both as per 11 September 2024 market close – since August 2022}

If you struggle to find high-quality stock ideas, let me inspire you. As a Premium or Premium PLUS Member, you receive my exclusive research reports with my best and market-beating stock ideas.

Long live the dead

As a first step in my research process for this analysis, I briefly thought about my personal online shopping behavior while being reminded of Peter Lynch and his boots-on-the-ground research regarding – in his times physical – retail stores.

It might be shocking to some, but I must confess that I am at least buying as often from eBay as from amazon. Without a doubt, I may be a big outlier, but the latter hasn’t become the “everything store” for me, quite to the contrary. It offers too much of nothing for me. Occasionally, I make one or the other find, but the user experience has become worse since being spammed with paid placements.

I am also reluctant to go for a prime subscription as I personally try to avoid too many of these hidden money suckers convenience offerings.

Certainly, I am not representative for the masses.

From time to time, though, it makes absolutely sense for me to order something from eBay, especially when I am searching only for one particular item or book instead of being indirectly forced to buy more stuff only to reach the threshold for free shipping.

That’s how I came to the idea of looking at the stock of eBay.

On the chart above, we can make the observation that the general long-term trend is up – and not down like one might be tempted to assume.

Since eBay and PayPal went separate ways, eBay’s stock has doubled until today.

And not only that, it has even left PayPal way behind it:

Don’t tell me that valuation does not matter! 🙂

Though not a brutal growth story, it does not look like a dying one, either. Leaving the tech and internet bubble of 2021 aside (at least for small and mid-sized companies), eBay’s stock has even reached its highest level.

There must be something in it.

Before we dive into the company’s financial statements, first for a better comparison, eBay’s gross market value (GMV), i.e. the value of all traded items on its platform in 2023 was 73 bn. USD. In comparison, amazon as a whole with all its 22 domains saw 729 bn. USD in GMV and about half of that on amazon.com alone.

Or in other words, eBay today is only a tenth of amazon using this metric.

On one side a big difference, on the other surprising to see eBay still being relevant. As it seems, I am not the only buyer on eBay. 🙂

eBay says in their latest annual report that they have 132 mn. buyers on their platform.

Also part of the truth is, though, that eBay had a higher GMV ten years ago with 82–83 bn. USD in 2014 and 2015 each, so this figure is down by 10% over the last decade. It is an important yardstick because platforms like eBay or amazon take their cut in the form of fees from it.

I purposefully did not use the equity market capitalization of eBay (~29 bn. USD) and amazon (1,800 bn. USD or 60x eBay), as it is misleading due to amazon being way more than a pure-play online retailer.

The more so, as the money is earned in its cloud segment – one that eBay lacks.

What is interesting and astonishing, though, is operating profitability. Despite GMV being down, we can see that eBay has been able to generate operating margins of at least 20% in each year since having spun off PayPal.

Free cash flow generation also looks fairly strong with double-digit values, though it’s more volatile.

These are numbers other online retailers currently are only dreaming about.

Having in mind that GMV is down over the last decade, it is quite an achievement to see that eBay was able to, even though only slightly, increase its sales over the same time period.

With around 10 bn. USD is sales, we do not need to start a discussion about that compared to amazon these are almost peanuts.

But as said, eBay is very profitable, sales have not been declining and expectations are rather low for the stock as the PE ratio of only 12x (see the Seeking Alpha chart above) suggests.

What does eBay do with the money it earns?

First of all, eBay has been a serial acquirer of lots of smaller companies as this list on wikipedia (see here) shows. From time to time, they also dispose some assets, but all in all eBay remains what it is – eBay.

Going a bit deeper into the numbers, we can see that by end of 2023, eBay had a balance sheet with about 1.5 bn. USD in net cash.

As per the latest numbers (30 June 2024), this has changed a bit.

The numbers flipped to a small net debt position of 2.5 bn. USD (with 5 bn. USD of cash, 7.6 bn. USD in financial debt).

Free cash flow generation is the next key topic to have a look at.

We don’t see any growth, but it is fair to say that eBay is able to hold the numbers steady – more or less with roughly 2 bn. USD in annual free cash flow. Putting the debt number against it, the balance sheet looks okay.

Not only since eBay was pressured by activist investors Elliot Management and Starboard Value (see here, here and here), has the company been buying back its own stock frequently.

We can see that in most years, the total amount spent on buybacks even exceeded total free cash flow generation. Nonetheless, until this day eBay’s balance sheet is only modestly leveraged, as they also sold occasionally some assets.

eBay is also paying a modest dividend, however, I didn’t include it in the chart below.

The bottom line is that share count has shrinked massively.

If you’re looking for an example of a beast of a cannibal, look no further than eBay. Stock outstanding decreased from 1.1 bn. to 0.5 bn. – more than 50% in not even eight years!

In every year with the exception of 2023, share count dropped by at least 5%, on three occasions even by more than 10%. During 2024, the number is until now –2.5% – the pace is being kept up.

What’s the catch now?

There are a few things that make this seemingly good-looking setup a too risky adventure.

First of all, the active user base. So far, we’ve seen GMV and the figure of 132 mn. buyers from the latest annual report.

The issue here is that this number has been declining as of late at a rather too high pace for me. I checked it for all years since 2011 and put them down in the following table (until 2014 called “active users”, since then “active buyers”):

2011	2012	2013	2014	2015	2016	2017	2018	2019	-20	-21	-22	-23
100	112	128	155	162	167	170	179	180	185	147	134	132

In 2021, eBay sold its assets of StubHub, a non-core ticketing service, for 4 bn. USD that’s why the drop in active user numbers might look a bit harsher than it was on an adjusted basis.

However, we can see that in the following years, the decline continued.

Over the years, I started to develop a rather negative feeling when I see a company which depends on an at least stable, but ideally growing user base. In the case of eBay as is, the company is back to 2013–2014 with its active user base which is not what I like to see.

Point number two is free cash flow and the valuation.

Free cash flow numbers need to be adjusted for stock based compensation which has been rising over the last years.

So if we pull out the ~600 mn. USD in SBC, the effective free cash flow for shareholders is about 1.5 bn. USD or about a quarter less for FY 2023.

Over the last twelve months, the trend has even worsened, as free cash flow minus SBC has even dropped to below 1 bn. USD.

Nonetheless, let’s be generous and use last year’s number of 1.5 bn. USD (after subtracting SBC) and putting that against an enterprise value of ~32 bn. USD (market cap ~29 bn. USD, net deb ~3 bn. USD), this definitely does not look like a bargain with a multiple of ~20–21x.

To get interested, I’d want to see a rather desperately looking figure around 10x or ideally even lower.

Even adding strong buybacks of 5–10% p.a. into the calculation (assuming they will continue, but realistically at current prices rather on the lower end) with lackluster top line growth, it is not possible to convince me of this case. So, we are not having a lucrative deep value play here, despite at low-looking 12x PE ratio.

And third: the development of the total market cap over time.

As net debt is low, we can use the equity market cap.

It only makes sense to draw a conclusion since the PayPal spin-off in mid-2015.

Since then, eBay’s market cap has fallen and despite its recent run (of its stock), the entire market cap is still somewhere in the bottom half during this time span. Above, we can see that the thesis of eBay seeing a long-term uptrend at the latest at this point cannot be defended anymore.

The stock is trending higher due to massive buybacks, similar to the case I presented last week (see here). But the entire company does not experience the same.

This of course is not bad per se, as neither I nor my readers (likely) are interested in buying the whole company, but only pieces of it. Nonetheless, with too many headwinds (especially falling GMV and active buyers), combined with a rather maxed out valuation and on top now consumer sentiment also rather weakening, I am folding at this point.

It looks promising at first sight, but it is rather a melting ice-cube at a premium price.

Conclusion

eBay is one of the dinosaurs of online retailing. Despite not being a growth company, it is still well alive.

Its stock has seen a strong uptrend since the separation with PayPal in mid-2015 – mainly due to aggressive buybacks. But its user base is crumbling.

All in all this seems to be more a melting ice-cube at a premium price than a deep value bargain.

By becoming a Premium or Premium PLUS Member, you get instant access to all my already published research reports as well as several updates.

Likewise, you qualify for eight, respectively three more exclusive reports with my best investment ideas plus updates on the featured businesses over the next twelve months.

Premium PLUS Members also get access to all Premium publications.