3 Reasons eBay Inc. Stock Could Rise

Markets Motley Fool

In a previous article, I laid out the bear case against eBay (NASDAQ: EBAY). Today, let's take a look at some ways the e-commerce leader's stock could trend higher in the coming years.

Continue Reading Below

1. Core marketplace gains

eBay is taking a back-to-basics approach with its marketplace business. The company is working to improve its customer experience by simplifying and modernizing its platform.  Improvements include a new homepage, which has seen lower bounce rates and better user engagement. eBay is also using structured data and artificial intelligence to personalize its shopping experience by tailoring it to each user's interests, which has led to increased customer traffic and sales conversions.

These moves are helping to accelerate eBay's growth. The company added nearly 2 million active buyers to its platforms in the second quarter, for a total of 171 million. That helped marketplace gross merchandise volume -- which consists of the total value of all successfully closed transactions on eBay's platform -- rise 6% on a currency neutral basis, up from 5% in the first quarter. In turn, revenue grew 7% to more than $2.3 billion.

To further fuel growth, eBay recently partnered with multi-platform commerce company Shopify (NYSE: SHOP). The deal gives Shopify's more than 500,000 merchants the ability to list and sell their products on eBay directly from their Shopify account. Thus, this partnership should help to significantly expand the number of sellers and product inventory on eBay's network over time.

2. A new approach to ads

Continue Reading Below

An often overlooked yet sizable portion of eBay's revenue is derived from its marketplace marketing services business, which generated $283 million in sales in the second quarter and more than $1.1 billion in the past year.

These figures could rise significantly in the coming quarters, as eBay plans to bolster its internal advertising sales team and focus exclusively on selling ads for products sold directly on eBay. CEO Devin Wenig explained the reasoning behind the company's increased investment in this area during the company's fourth-quarter earnings call:

Increasingly we're seeing good results from internal ads, ads for eBay sellers promoting their inventory in our search results and in other places on our site. And for us that's a really, really good flywheel because it keeps our buyers inside our marketplace, it allows us to create a new stream of monetization, and it allows our sellers to buy up for promotional activities.

eBay's shopping data is a treasure trove for advertisers that could make its platform even more attractive than Facebook or Google for its merchants' product ads. And if eBay sellers realize improved returns on their marketing investments by advertising directly on eBay, ad sales could become a powerful new growth driver for the e-commerce giant.

3. Dividends

eBay's asset-light business model produces copious cash flow. To date, management has chosen to return much of this cash to investors via share repurchases, which has helped to boost earnings per share and support eBay's stock price.

While shareholders no doubt appreciate these stock buybacks, many investors would probably prefer a dividend. Sophisticated investors know that dividend-paying stocks tend to considerably outperform non-dividend stocks, and with less volatility. Therefore, if eBay were to begin paying a dividend, its stock could become attractive to a whole new class of income-seeking investors, which would probably boost demand for eBay's shares and help to drive its stock price higher.

10 stocks we like better than eBay
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and eBay wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), eBay, Facebook, and Shopify. The Motley Fool has a disclosure policy.