eBay Stock: GMV Downside Scenario Is Believable (NASDAQ:EBAY)

Introduction

This article will briefly dive into an analysis of the upside and downside case for eBay Inc. (NASDAQ:EBAY) with a focus on GMV before making the argument that the downside case for GMV is more credible. For those well-versed in the bull/bear debate on the name, I would recommend skipping to the “GMV Analysis” section for the bulk of the value-add analysis.

From my experience, the debate on EBAY has been pretty consistent over the last few years. Bulls will say that the company is cheap on multiples relative to ecommerce peers and despite market share losses, the company generates an incredible amount of free cash flow, which management is keen on returning to shareholders. The bears argue that EBAY is a value trap and that its declining relevance as an online platform will erode its ability to generate future revenue/profits. Many investors will agree that what it really comes down to is the future projection of GMV and whether management’s initiatives can revitalize the platform sustainably.

We will start by taking a quick look at what you need to underwrite to believe in the bull and bear case by looking at 1) the ultimate upside scenario as laid out at the 2022 Investor Day, 2) what you need to believe in to get to the current market price, and 3) what the downside scenario could look like.

From there, we will dive deeper into GMV and attempt to quantify the impact of management’s Focus Categories strategy on volumes over the next few years as well as breaking down EBAY’s cohort of active buyers. The conclusion from this analysis, which I was actually quite surprised by, is that there is further downside to street’s GMV forecast, putting me in the bear camp of the debate.

The Bull, Current, and Bear Case

The Bull Case

The bull case for EBAY goes as follows: management’s Focus Categories strategy and its focus on non-new-in-season inventory will drive medium-term MSD GMV growth, payments + promoted listing to increase take rates and further driving MSD-HSD revenue growth, and margin expansion + consistent buybacks to drive DD EPS growth.

Based on the medium-term outline provided at the investor day, we can get to a ~$70 PT (assumptions outlined in the exhibit below).

Of course, almost immediately after the Investor Day on 1Q22 earnings, EBAY guided down the full year on a weak and quickly deteriorating macro environment, so very quickly we had to toss these projections out the window. To be fair, management continued to execute on its original plan through new payment initiatives, expanding Focus Categories, and continued growth in 1P advertising so not all was lost. I would characterize the optimistic bull case now as eventually getting back to those projected financials ($89B GMV, ~$12B/$3.8B Rev/EBIT) but at a meaningfully later date when the macro environment fully recovers. Given the time value of money, we can probably take that $70 PT and roughly knock it down 15% or so to get to a $60 bull case PT, which is consistent with the highest sell-side PT currently.

Current Case

Given a current stock price of ~$43-$44, we can work backwards to arrive at a trajectory exemplified in the exhibit below.

What we’re underwriting here is effectively management’s continued execution in 2023 despite a much weaker than expected macro environment driving consumer spending lower. In this scenario, payments is able to reach the $300M in incremental revenue target vs 2021, albeit in 2025 and not 2024 while advertising contributes ~$700M in incremental revenue vs 2021 compared to the original target of $1B.

Bear Case

The bear case on EBAY goes as follows: the EBAY platform continues to lose share to vertical specialists like REAL, ETSY, and StockX driving medium-term flat to LSD GMV growth, meaningfully below HSD global ecommerce growth. The bulk of the payments and 1P advertising initiatives has run its course so take rate growth will be significantly less than previously, driving the revenue/GMV growth gap to 100bps by 2025 and then subsequently to nearly 0. All this while margin expansion is much weaker than projected due to 1) less margin leverage from weaker GMV growth and 2) management having to continually reinvest just to keep pace with LSD GMV growth. Harsh I know, but possible. The trajectory can be exemplified in the exhibit below:

GMV Analysis

The bull, current, and bear case describe a pretty different GMV trajectory over the next 3 years (see bar chart of annual GMV Scenarios chart below graphing the GMVs from the cases above). This section takes a deeper look at EBAY’s GMV in the context of management’s Focus Categories strategy and then sanity check the results by doing the same exercise with EBAY’s buyer cohorts.

Focus Category vs. Non-Focus Category

EBAY has pivoted to a focus on what they call Focus Categories, which now accounts for ~25% of GMV with a goal of bringing that focus to cover 50% by 2024. These are product categories where the company is leaning in and investing specifically in the buyer and seller experience of that category – it can be described as EBAY becoming vertical-specialists one category at a time vs the bazaar-like messiness of the platform at inception. In categories like sneakers, watches, handbags, and trading cards (part of collectibles), a big improvement was on authentication to build trust with the buyers. For parts and accessories (P&A), the Guaranteed Fit program backstops the fact that the part will fit a buyer’s vehicle. For refurbished items, EBAY is emphasizing 30-day returns and 2-year warranties to buyers while signing on more brands and OEMs on the seller side.

Numerically, the way I think about Focus Categories (“FC”) is like a waterfall – you start with the total BOP GMV in Focus Categories, you add the $ growth you get from those categories, you then add the new GMV that management is rolling into Focus Categories (for instance, more recently management has talked about fine jewelry entering FC), and that gets you to the total EOP GMV in Focus Categories. For non-Focus Categories (“non-FC”), the waterfall is similar except the amount you add as new GMV into Focus Categories is the same as the amount you take out of non-Focus Categories. See my projected waterfall below:

Assumptions and Comments

Starting with global ecommerce growth, we see that FC growth of (-5%) FXN in 2022 was -12ppt below total industry growth of +7%. Using the projected global ecommerce growth, I assume the delta between industry and FC growth narrows as management invests heavily in the buyer and seller experiences. This gets us to FC growth of LSD growing to MSD by 2025.

For non-FC growth, I narrow the delta between FC and non-FC (management speaks to this, which was ~8ppt delta in 1Q23). Management claims that the delta here should shrink over time – I’m not entirely sure why that would be the case. The explanation of “more denominator in the numerator” didn’t make much sense to me since there’s no division being done but I think they mean that as more lower growth non-FC moves into FC, the delta shrinks. My counter to that is that you’re more likely to move higher growth non-FC categories to FC since those have the most potential so the remaining non-FC categories have even lower average growth. But it’s fine, management has more visibility than we do so I’m assuming the delta narrows over time.

The big credit I’m giving to management here is assuming that FC GMV will narrow its delta to global ecommerce growth but also that newly added non-FC GMV will also rise to such growth driven purely on management’s execution. Usually it’s one or the other because as you bring lower growth non-FC into the FC category, the FC category as a whole slows, but I’m assuming management is able to accelerate everything moved into the FC category.

Despite the credit we’re giving to management’s Focus Categories strategy, GMV growth doesn’t result to the upside. In fact, projections result in GMV of ~$73B, similar to the bear case scenario and growing LSD.

Now let’s take a look at the buyer cohorts to sanity check this math…

Buyer Cohort Breakdown

From 2015 to 2018, EBAY GMV grew in the MSD-HSD range, driven partly by a number of technology investments like expanding the mobile platform and structured data but also a ramp up marketing experiments to drive new buyers to the platform with aggressive SEM and SEO plus investments in buyer incentives. During that time, active buyers grew from 162m to 179m. In 2018, there were an increase in low ASP coupons, driving an increase in what is now considered “low-value” buyers. This ended in late-2018/early-2019 when management recognized that the ROI on these incentives weren’t very good and began to pull back, driving FXN GMV growth to (-2%). Jamie Iannone described it as acquiring active buyers at “any cost”.

Since Iannone took over, management has given more details about the buyer cohort, explaining at the Investor Day that of the 147M buyers, 19M were “enthusiastic”, average >$3,000 an annual spend while low value buyers were ~50% of total buyers but contributing only 5% of GMV. Based on incremental disclosures on every earnings call, I’ve constructed a buyer cohort analysis below with some projections:

Assumptions and Comments

Assuming a steady cohort of enthusiastic buyers gradually increasing spend by ~2% annually as management chooses to invest in improving the customer experience in its core competency and thus driving wallet share expansion. This group has the biggest leverage on overall GMV and management’s continued execution here can drive upside to these numbers. I’ll be keeping a close eye on any commentary on this cohort.

For the mid-value cohort, I’m assuming a small increase (~1% annually) over the next few years roughly with no meaningful change to annual spend. My sense is that this cohort isn’t the primary focus of management’s latest set of initiatives but could residually benefit from some of the authentication and Focus Categories efforts. For those also keeping track of the buyer cohorts, you’ll notice that I’ve grouped the ~9m buyers who are described as “occasional buyers who also sell” into the mid-value category since I estimate that their spend is much closer to the mid-value cohort at ~$300-$400 per year.

The low-value cohort, a large number of whom were attracted to the platform with 1x coupons or other buyer incentives are no longer a focus area for management since it does not generate sustainable volume growth. As such, we expect churn to continue quite meaningfully in this cohort, losing ~19m users between 2022 and 2025, driving $317M/$285M GMV headwind in FY24/FY25 or ~40bps to GMV growth in each year.

So even breaking out the buyer cohorts gets us closer to the bear case GMV scenario under reasonable assumptions. The key lever is whether management can meaningfully grow Enthusiastic active buyers as that cohort can drive upside to our estimates.

Conclusion

I had originally begun my GMV analysis expecting to show meaningful upside to GMV but that was not the case. Why you might ask? Because just eye-balling the GMV line, you’d expect a sizable rebound in 2024/2025 after (-15%) declines in 2022 and my expected (-4%) decline in 2023 – that’s pretty common sense I thought. Instead, by breaking out the Focus Categories and sanity checking GMV projections by buyer cohort, I’m arriving at a minimal rebound in FY24 and only LSD growth in FY25. My guess is that there are many analysts who are still modeling a recovery in GMV growth over the next two years just purely on “common sense” (I was part of that camp before this exercise). Admittedly, the risk to the upside for GMV is all about execution with the Enthusiastic buyer cohort. We will need to see that cohort grow to closer to 18M by 2025 and continuing to see increase in average spend per year to get to a GMV closer to what’s being implied by the current price. Similarly, we’ll need to see Focus Category growth get much closer to global ecommerce growth of HSD to underwrite any real upside to current prices. The bearish conclusion isn’t new but hopefully this article helped put some numbers around the debate. The GMV dive suggests that EBAY is indeed not cheap enough to warrant an investment at these levels but keep an eye on the Enthusiastic buyers – if we can get line of sight to ~18M with no degradation to spend, then that’ll be the signal to re-evaluate, >20M to see meaningful upside to the stock.