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eBay’s Slightly Improved Growth Is Coming at a Price

Those scanning the many news headlines stating eBay Inc.’s (EBAY) shares are selling off due to a disappointing profit outlook could be forgiven for thinking the company’s latest earnings report acts as fresh proof that Inc. (AMZN) is eating its lunch. The truth is a little more complicated.

Competitively, eBay still faces big challenges, but seems to be in slightly better shape than it was at the start of the year, particularly overseas. The trouble is that this top-line improvement has a bottom-line price attached to it.

eBay reported Q3 revenue of $2.41 billion (up 9% annually) and adjusted EPS of $0.48 (up 7%). Revenue beat a $2.37 billion consensus analyst estimate, but EPS was only in line.

Likewise, though eBay’s Q4 revenue guidance of $2.58 billion to $2.62 billion (implies 9% growth at the midpoint) is favorable to a $2.58 billion consensus, EPS guidance of $0.57 to $0.59 (7% growth at the midpoint) is below a $0.60 consensus.

The EPS numbers would be a little worse still if not for stock buybacks: $907 million was spent on buybacks in Q3, and management signaled fresh repurchases would be made in Q4. Revenue growth, meanwhile, is benefiting from currency swings, after having been hurt by them in Q2.

Shares fell 5.9% in after-hours trading to $35.74. They were up 28% on the year going into earnings.

One key reason for the light EPS numbers: eBay’s take rate (revenue cut) on transactions that happen on its marketplaces is being pressured by “promotional pricing” offered to consumer and small-business sellers to drive listings. Such discounts led the Marketplace take rate to remain flat sequentially and annually at 7.8%, despite fee hikes that went into effect May 1.

Also weighing on EPS: Despite higher volumes, eBay’s adjusted gross margin fell to 77.7% in Q3 from 78.3% a year ago due to a weak dollar (results in higher overseas costs) and an inventory program for sellers on eBay’s South Korean marketplace. And while sales & marketing spending fell to 25.2% of revenue from 26%, eBay indicated it will increase its ad spend in Q4, partly via holiday-season branding campaigns in big markets.

StubHub also remains a headwind. Though the ticket marketplace’s transaction revenue managed to rise 5% in Q3 to $273 million (that’s better than Q1’s 1% growth), CEO Devin Wenig cautioned StubHub would see “continued pressure on growth through the rest of the year,” while noting efforts to keep to keep tickets off StubHub for many events was a factor. “[W]e have competitors that are looking to restrict markets, restrict ticket access to supply,” he said. Intriguingly, Wenig added eBay will have “more to say” about the issue in time.

On the bright side, eBay’s Marketplace gross merchandise volume (GMV) grew 9% in dollars and 7% in constant currency (CC) to $20.5 billion, after having grown 3% in dollars and 6% in constant currency in Q2. While U.S. GMV only grew 5% to $8.8 billion, international GMV grew 9% in CC to $12.9 billion. That led Marketplace’s transaction revenue to rise 8% to $1.61 billion, and its revenue from ads and other sources to rise 7% to $293 million.


In addition, eBay forecast that outside of South Korea, where the timing and extended length of the country’s 2017 Thanksgiving holiday is a headwind, GMV growth would accelerate once more in Q4. The company also forecasts low-to-mid-teens CC growth for its Europe-driven Classifieds business, which in Q3 saw revenue rise 19% in dollars (13% in CC) to $235 million.

Even with the improved GMV growth, eBay is still losing e-commerce share to Amazon and various other rivals. Particularly in the U.S., where comScore estimates the total U.S. market is growing 15%. With the help of Amazon Prime’s runaway momentum, Amazon posted 27% revenue growth for its North American e-commerce segment in Q2, and 38% growth for its global retail third-party seller services revenue. It looks like eBay is now willing to sacrifice its take rate a bit to narrow the gap between its GMV growth and Amazon’s marketplace growth.

That said, eBay has been competing relatively well overseas against Amazon, whose International e-commerce segment revenue grew 17% in dollars and 19% in CC in Q2. In addition to seller discounts, various technology investments eBay has been making are paying off a little.

These include the company’s Structured Data initiative, which tags listed items based on their features and leads to a better product-searching and browsing experience, as well as efforts to deliver better product recommendations and let sellers quickly list items from a product catalog (with eBay providing pricing and shipping recommendations). eBay also reports seeing better conversion rates for traffic from third-party search engines (much of it presumably from Alphabet Inc./Google (GOOGL) ) with the help of Structured Data — both for organic and paid (ad-based) traffic.

Such efforts, together with eBay’s continued popularity as a venue for buying niche items and various smaller/cheaper goods, seem to have given the company a formula for delivering moderate growth in its core business, at least over the short-term. But it isn’t clear yet that it has a formula for doing this without sacrificing its take rate or margins.

And with eBay’s shares having posted sizable 2017 gains amid a tech rally, that’s sparking a round of profit-taking.