Description

To frame my perspective here, I don't own this stock right now, yet I wouldn't short this stock under any circumstance. eBay has a terrific business model with a solid management team, and free cash flow has been gushing. I am a former eBay shareholder (realized gain in 2021), and I'd like to own it again, but I only own a handful of stocks and I couldn't rationalize keeping this one in the portfolio.  The shares are optically cheap at the current price, and may prove to be a very good investment from here if my two primary concerns below are wrong.  Further, I like eBay the platform - I am a somewhat active eBay buyer (and occasional seller, mainly of used sporting goods), though not nearly as active as I used to be.

Specifically, my previous long thesis was grounded in five characteristics:  (i) a new, intelligent, well-incentivized CEO with a highly relevant background; (ii) an attractive business model, with what I believed was a healthy buyer/seller ecosystem and and that provided theoretical real-time inflation protection; (iii) valuable non-core assets in the process of realization, with cash proceeds deployed into an extremely aggressive share repurchase program; (iv) strong current free cash flow generation; and (v) outlier potential for a strategic sale to Walmart or Target.

I changed my mind for two reasons.

First, the new CEO’s decision to curtail the company’s direct coupon program kept gnawing at me.  His argument – likely true in theory – that coupons tended to attract “low-value” buyers increasingly reminded me of Ron Johnson’s in 2012 when he took over the helm of J.C. Penney (“JCP”).  Ten years ago, on the first quarter 2012 JCP earnings call, Johnson said “And we expect 2013, as we said, one year later, will be the year when takeoff starts.  We won't have a single coupon to go up against, a single promotion.  All we will have is new products, new presentation and a lot better understanding of our strategy.”  From the time of this call to the end of 2013, JCP shares fell from the mid-$30s to the $5s, and JCP shares were optically “cheap” to many investors all the way down.

Will history repeat with eBay?  I doubt it.  As an online, toll-collecting marketplace with no inventory, it is a far better business than a traditional retailer.  eBay can rely on other forms of buyer incentives, including coupons and deals offered by sellers, and generates advertising revenue.  However, my concern became that history would rhyme, as there is an intangible benefit to the activity and word-of-mouth marketing that accompanies a traditional couponing strategy.  If people are accustomed to opening your app and seeing coupons, ending that dynamic is likely to reduce traffic and mindshare.  To that end, while the e-commerce boost in 2020 from coronavirus makes comparables difficult to assess, active buyers did decline 5% in the third quarter, which management claimed were of the “low-value buyer” cohort.  Fourth quarter active buyer numbers will be telling when released.  Multi-sided marketplaces are driven by network effects and are some of the best businesses in the world when the virtuous cycle is building, buyers/sellers/mindshare/activity are growing, and operating leverage is driving increasing profit margins and cash flow.  However, if these dynamics reverse, it is easy to enter a negative spiral, whereby active buyer declines cause sellers to leave for other platforms, further reducing buyer interest and resulting in lower margins and much lower cash generation over time.

My second concern related to trading and supply/demand dynamics for the shares. With 3q21 earnings, the company announced that it increased its 2021 share repurchase target from $5bn to $7bn. For context, the target began the year at $2bn but was raised after the sale of non-core assets. As a result, the company was announcing that it would be repurchasing $3bn of stock (nearly 8% of shares outstanding) in 4q21 alone to achieve its $7bn target. As great as this was from a financial engineering perspective, it represented a temporary, non-recurring, unnatural increase in demand for eBay shares.

In sum, I believe eBay is one of America’s great companies, but it is possible that the fundamentals of the ecosystem and technicals of the buyback will both be headwinds to the stock in the quarters to come.

However, if the business proves stable, and active buyers and sellers resume modest growth, we could see substantial FCF growth and multiple expansion.

I am very interested to re-start this discussion on VIC, as I am a bit surprised the company hasn’t garnered more attention recently.

Disclaimer:  The author of this idea presently has NO position in securities of this issuer but may enter, trade in and out of such positions, long or short without notice.  The data contained herein are prepared by the author from publicly available sources and the author's independent research, estimates and opinions.  No representation or warranty is made as to the accuracy of the data or opinions contained herein.  Please do your own research.

Catalyst

Active buyer numbers.

Normalized share repurchase dynamics.

Other: advertising, payments revenue, non-core asset sales continue to surprise to the upside; potential strategic sale or LBO