Why eBay Stock Remains A Good Bet Even After This Year’s 30% Rally

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Something exciting is happening with e-commerce giant, eBay Inc.(NASDAQ:EBAY). Its shares have surged more than 30% this year, outperforming both the benchmark NASDAQ index and its much bigger rival Amazon.com (NASDAQ:AMZN). Shares rose from $28.07 on Dec. 31 to $37.25 at yesterday’s close.

This resurgence comes after last year’s slump that pushed eBay’s shares down more than 40% between February and December. Investors’ renewed excitement about eBay, however, has little to do with the company’s earnings. It comes at a time when the company has been delivering sluggish growth, and on Jan. 29 gave a disappointing revenue forecast for the current year.

Why eBay Stock Remains A Good Bet Even After This Year's 30% Rally

eBay daily chart

The reason eBay is becoming more interesting to follow is an increasing expectation that two activist investors, who have accumulated significant stakes in the company recently, will push for changes that would unlock future value.

The two investors, hedge fund managers Elliott Management Corp. and Starboard Value LP, want the online marketplace to consider selling or spinning off some parts of the company and to return more capital to investors as a way to break out of its torpid growth phase.

Billionaire Paul Singer’s Elliott Management sent a letter in late January to the eBay board, proposing a five-step plan to turn around the company. Elliott, which reportedly owns more than 4% of eBay, is proposing the spinning off of StubHub, eBay’s tickets marketplace and its classified business.

And it seems the board is listening. While announcing its fourth-quarter earnings on Jan. 29, eBay for the first time initiated paying a dividend—$0.14 a share quarterly—and added $4 billion to its share buyback plan. Combined, this will return a total $5.5 billion to shareholders this year.

Great Plan but Challenging Environment

It’s no secret that eBay needs a solid strategy to impress investors. In the decade when its main rival Amazon delivered dizzying growth, eBay lacked direction and failed to accelerate expansion in its core Marketplace business.

The company, which pioneered e-commerce, reported just 5% growth in gross merchandise volume in the most recent quarter for its marketplace business, showing a sharp slowdown from the period a year ago. In the fiscal year 2019, eBay is forecast to generate just $10.86 billion in sales, peanuts when compared to Amazon’s projected $275 billion for the same period.

That said, there is no doubt that eBay has a great brand and that brand isn’t going to go away. If activist investors are able to push through the reform agenda they have proposed for eBay, the company’s shares could prove a good turnaround bet for patient investors.

But, in our view, there are risks to this approach as well. The e-commerce landscape is becoming increasingly competitive, with the major brands spending heavily to keep their customers on their own platforms.

Some of the world’s largest retailers, including Walmart (NYSE:WMT) and Target (NYSE:TGT), have been able to grow their online businesses massively during the past one year and that trend is unlikely to stop. In this macro backdrop, it won’t be easy for eBay to sell everything else and “expand the universe of what is transacted on its Marketplace,” a simple solution proposed by Elliott Management.

Bottom Line

For long-term investors, eBay stock offers an opportunity to earn income from a solid brand, now that the company has initiated its dividend program. Increasing cash returns from eBay means the company is entering a mature business cycle, exiting its high-growth path.

With that perspective in mind, we think eBay is still a good bet even if its activist investors fail to get their turnaround plan rolling anytime soon.

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