Why 2017 Was a Year to Remember for eBay Inc.

Markets Motley Fool

Online auction pioneer eBay (NASDAQ: EBAY) is often overshadowed by Amazon.com’s (NASDAQ: AMZN) superior growth in the e-commerce market. Yet eBay, which spun off PayPal (NASDAQ: PYPL) in mid-2015, still rallied more than 20% this year and beat the S&P 500’s 16% gain.

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Let’s take a closer look at how eBay outperformed the market this year and whether it can keep climbing next year.

Accelerating revenue growth

eBay’s revenue rose 9% annually to $2.4 billion last quarter, marking its third straight quarter of accelerating sales growth and its highest growth rate in nearly three years. For the full year, eBay expects 6%-8% organic currency-neutral sales growth, compared to 5% growth in 2016.

Stable growth in GMV and buyers

eBay’s top-line growth was supported by its steady growth in GMV (gross merchandise volume), which measures the total value of all goods sold through its website, and its stable growth in active buyers.

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GMV rose 7% on a constant currency basis last quarter. eBay added nearly 2 million active buyers during the quarter, bringing its total active buyer count to 168 million. This compares favorably to the previous quarter, when its GMV rose 5% on a constant currency basis and it added 2 million active buyers.

The steady growth of StubHub and Classifieds

eBay’s core Marketplace business, which posted 8% annual sales growth last quarter, generated over two-thirds of its revenue. The rest came from its smaller StubHub and Classifieds businesses.

StubHub, its online exchange for tickets, posted 5% revenue growth and 2% GMV growth on steady demand for theater and NHL tickets. However, eBay expects the business to face slower growth throughout “the rest of the year,” and that slowdown could weigh down eBay’s overall growth.

Its Classifieds revenue rose 13%, representing an acceleration from the second quarter, thanks to the strength of its mobile.de automotive sales platform in Germany. eBay expects the Classifieds business to continue generating “low to mid-teens” revenue growth throughout the year on improvements in “traffic, engagement, and mobile app monetization.”

Innovations and partnerships

eBay’s platform is often dismissed as a static, slowly evolving one in comparison to Amazon’s, which repeatedly expanded and disrupted new markets with killer services like Amazon Prime and Amazon Web Services. But eBay has also been evolving with the establishment of its Innovation and New Ventures unit.

That newer unit tested out technologies like RedLaser, a product scanning app for finding the best deals online, and Connected Glass, which lets retailers use large in-store touch screens to sell items and process payments through PayPal. Other innovations include letting users organize search results by product types instead of individual listings, or searching for products based on photographs. These improvements are driven by eBay's investments in AI, which also help the company analyze and predict shopping trends.

eBay is also expanding its product offerings -- which already include a billion live listings -- with fresh partnerships. Last quarter, eBay partnered with Spring, a high-end fashion marketplace, to add “hundreds” of new fashion brands to its site. This could widen eBay’s moat against Amazon’s ongoing expansion into private-label apparel.

Buybacks and better earnings growth

eBay spent nearly $2.7 billion on buybacks over the past 12 months. Those moves were well-timed, since its stock rose during that period, and propped up its EPS growth as its gross margins slightly declined.

Non-GAAP earnings rose 7% annually last quarter, and the company expects to finish the year with 6%-7% earnings growth. But the high end of that estimate, at $2.01 per share, missed analyst expectations by a penny. That seemingly minor miss caused the stock to dip about 3% over the past month.

But will 2018 be better than 2017?

I’ve never been a big fan of eBay, since Amazon has always been my preferred e-commerce stock. But I understand why investors were impressed by eBay’s accelerating sales growth and decent earnings growth over the past year.

But looking ahead, I think investors should be wary about eBay’s long-term growth. Its revenue growth looks solid, but it’s too dependent on buybacks to boost its earnings. In fact, its buybacks used up 123% of its free cash flow over the past 12 months -- money that would arguably have been better spent on innovations for its website and app. Therefore, eBay had a good year, but I doubt that it will outperform the market again next year.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, eBay, and PayPal Holdings. The Motley Fool has a disclosure policy.