Shares of eBay (EBAY 1.32%) are down about 45% from their all-time high a few years ago, but investors have started to rally to the value that's underpinning shares so far this year. The stock has rebounded about 10% year to date.
Part of the reason for the rebound is that recently announced fourth-quarter earnings results came in ahead of Wall Street estimates. Management also guided for first-quarter revenue ahead of Wall Street expectations. The reason the rebound wasn't even higher is that gross merchandise volume, which is the value of all paid transactions in the marketplace, continued to decline year over year. This performance might have given market participants a reason to sell the stock following the earnings report, but is that justified?
Let's look at how eBay is positioning its marketplace for the future, and why investors might want to consider adding this value stock to their portfolio.
eBay's transformation is on schedule
CEO Jamie Iannone took over a few years ago and has been shifting eBay's marketplace to focus more on high-value, nonseasonal merchandise, such as luxury watches, handbags, trading cards, and other collectibles, which eBay refers to as "focus" categories. This is where the growth is.
While overall gross merchandise volume (GMV) on a constant-currency basis fell 6% year over year in the fourth quarter, on top of an 11% decline for the full year, the so-called focus categories grew faster than the rest of the marketplace.
These higher-value categories have grown at a double-digit percentage rate on an annualized basis since the fourth quarter of 2019. While this transition to nonseasonal goods is pressuring overall growth in GMV, eBay may eventually reach a point where growth accelerates as it progresses with this initiative.
Image source: eBay.
The shift to nonseasonal merchandise is part of a broader plan to align the entire business with a more tech-oriented vision. eBay made several small acquisitions last year, including KnownOrigin, a non-fungible token (NFT) marketplace, and myFitment, which helps vehicle sellers provide accurate data to help buyers get the right part for their vehicles.
The myFitment acquisition is already paying huge dividends for eBay's motors business. As eBay started rolling out myFitment's capabilities to all buyers in the fourth quarter, it saw a meaningful uplift in conversion. This contributed to an acceleration in parts and accessories growth. eBay will be rolling this feature out further in 2023, which is another way for management to grow GMV over the long term.
Attractive value
There are several paths management is taking to improve eBay's growth profile for investors. Its shift to nonseasonal merchandise is not only designed to drive faster growth, but also to add a greater number of unique items to distinguish eBay's seller inventory from competitors.
Meanwhile, eBay is generating stable free cash flow (FCF) and profitability. Its FCF margin relative to revenue was 21% in the quarter. That was good enough to grow FCF 43% year over year to $533 million, bringing eBay's trailing-12-month FCF to almost $2.2 billion. That should support the stock's market cap (total shares outstanding times stock price), currently at $24.5 billion, or 11 times FCF.
Image source: eBay.
eBay used all of its free cash flow last year to reward shareholders with share repurchases and dividends. It recently increased its quarterly dividend by 13% to $0.25 per share, bringing the stock's dividend yield to an above-average 2.2%.
With growth initiatives showing good progress, and the stock trading at a conservative valuation, eBay could outperform the market in 2023. At the least, it could perform well in an environment where rising interest rates are pressuring the valuations of growth stocks.
