eBay (EBAY) is an eCommerce company that provides a platform for buyers and sellers to connect and exchange goods online. eBay stock gained about 33% in 2021; can the company continue to outperform the market in 2022?
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I am neutral on eBay stock.
Revenue and Margins
After two years of declining top-line revenue, eBay returned to growth in the Fiscal Year 2020, and this has continued over the trailing twelve months (TTMs). In Fiscal 2020, the company brought in $10.3 billion in revenue, which has swelled to $11.7 billion over the TTMs.
Due to its business model, eBay’s profits have not been tough to come by over the years. eBay has a gross margin of well over 70% and posted an operating margin of 26.5% in Q3 2021. This has allowed the company to bank $662 million in operating profits in Q3 and over $2.9 billion in the last 12 months.
The company’s business model requires an active pool of buyers to create demand. eBay makes some money through advertising, but the vast majority is by charging transaction fees. Because of this, it is concerning that the number of active buyers dipped to 154 million in Q3 2021, down from 163 million in Q3 2020.
Investors will need to watch Q4 earnings closely to see if the company can reverse this trend. The trend may be the result of heavy competition from the likes of Amazon, The Real Real, Poshmark, and several others. eBay does not have a large moat.
Share Buybacks and Dividends
eBay has been aggressively returning capital to shareholders through dividends and share buybacks. In Q3 alone, the company repurchased $2.3 billion worth of its stock on the open market. $2.3 billion represents over 5% of the company’s current market cap. This is excellent for shareholders for multiple reasons.
First, unlike dividends, share buybacks are not taxable income to the investors. Next, the buybacks reduce the number of shares outstanding, thereby increasing the earnings per share. Finally, the buybacks support the stock price in the market by providing additional demand.
eBay has been prolific at reducing the number of shares outstanding in recent years. At the end of 2017, there were over 1 billion weighted-average diluted shares outstanding. As of the last report, this figure is down below 700 million.
Shareholders also received a small but safe quarterly dividend of $0.18 for a yield of just over 1%. Currently, the company trades at a forward price-to-earnings ratio of just under 15 and appears fairly valued.
Wall Street’s Take
Turning to Wall Street, analysts are somewhat bullish on eBay stock, with a Moderate Buy consensus rating based on eight Buys and 13 Holds assigned in the past three months. It is noteworthy that there are no sell ratings. The stock has a short interest of 4.6%.
The average eBay price target of $77.85 implies 19.8% upside potential.
Bottom Line
Profits continue to be made by eBay, and investors were rewarded in 2021 as the stock outpaced the S&P 500 slightly. It appears that revenue growth is trending in the right direction, and the company continues to use its free cash flow to reduce the share count and pay a small dividend.
The reduction in active buyers is concerning, as competition in the industry is fierce. eBay has analyst support; however, it appears to be fairly valued at the current price.
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