We came across a bearish thesis on eBay Inc. (EBAY) on The Finance Corner’s Substack by Kostadin Ristovski, ACCA. In this article, we will summarize the bears’ thesis on EBAY. eBay Inc. (EBAY)’s share was trading at $61.50 as of Nov 12th. EBAY’s trailing and forward P/E were 15.73 and 11.90 respectively according to Yahoo Finance.
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eBay, founded in 1995 as “AuctionWeb,” began as an online auction platform and quickly evolved into one of the most well-known global eCommerce companies. After changing its name to eBay in 1997, it grew by enabling individuals to buy and sell used items, particularly in categories like trading cards and collectibles. It has since become a leader in the second-hand market, with its auction model and prominence in Recommerce setting it apart from competitors like Amazon and Facebook Marketplace. eBay faces significant competition from larger eCommerce platforms, such as Amazon and Walmart, but continues to dominate in the resale market.
The company’s business model generates revenue primarily through transaction-related fees, including final value fees, listing fees, and advertising revenue, with roughly 85% of its earnings coming from transactions. Its key metrics—Gross Merchandise Value (GMV) and the “take-rate,” which represents eBay’s share of GMV—reveal a mixed performance. GMV has been flat since the pandemic, with a slight decline from $87 billion to $74 billion. However, the take-rate, which includes net revenue divided by GMV, increased from 9% to 14%. Despite this, a deeper look at the adjusted take-rate, which accounts for operating profit, shows minimal change, hovering around 3%.
Financially, eBay’s revenue has remained stable at approximately $10 billion annually, with significant contributions from international markets like China, despite declines in key European regions. The company’s U.S. revenue has grown slightly, while markets like the U.K. and Germany have seen declines, with growth driven primarily by China. This shift raises concerns about the quality of revenue, as the Chinese market comes with added risks. Despite flat revenue, eBay remains a strong cash generator, producing around $2 billion in free cash flow annually, signaling a solid financial position.
Capital allocation has been a major focus for eBay, with substantial cash returned to shareholders. The company has repurchased nearly $25 billion in stock and paid out $3 billion in dividends since 2019, reducing its shares outstanding by 40%. While this strategy is notable, a significant portion of the buybacks occurred when share prices were high, potentially diminishing the value of those repurchases. eBay also holds an investment in Adyen, valued at around half a billion dollars.
Looking ahead, eBay’s valuation appears high relative to its growth potential. With minimal opportunities for significant growth, particularly in developed markets where penetration rates are already high, the company is expected to grow in line with inflation. A conservative estimate places eBay’s fair value at $20.7 billion, or $43 per share, significantly lower than its current market price of $62. For the stock to reach its current price, eBay would need to double in size over the next decade, achieving an annual revenue growth rate of 7% and expanding its operating margin to 23%. Given its current trajectory, these growth assumptions seem unlikely, suggesting that eBay may be overvalued at present.
eBay Inc. (EBAY) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 38 hedge fund portfolios held EBAY at the end of the second quarter which was 42 in the previous quarter. While we acknowledge the risk and potential of EBAY as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than EBAY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.