After spinning off PayPal as an independent company in July 2015, eBay (EBAY) finds itself at a critical juncture with respect to the evolving digital commerce landscape as well as changing seller and buyer behaviours. EBay continues to feel the lingering impact of the May 2014 data breach/password reset and Google search algorithm changes, with management noting that core users have returned at high engagement levels but that it is also having difficulties re-engaging "occasional" users.
We would not be surprised to see the initiation of a dividend within the next several years or increased M&A activity
Management's blueprint for a bringing back users includes a "back-to-basics" approach, prioritizing unique product selection, improved seller tools, data-driven merchandising, structured/catalogue data for manufactured product listings (designed to alleviate search engine optimization issues and facilitate more dynamic pricing), increased mobile capabilities, and emphasis on adjacent platforms like StubHub and classifieds.
These efforts strike us as prudent, and we believe eBay's customer-to-customer offerings have carved out a network effect within the broader digital commerce landscape, the impetus of our narrow moat rating. However, we believe the difficulties re-engaging with occasional users demonstrates the disruptive power of Amazon's third-party platform, particularly among eBay's core small and midsize business, or SMB, sellers, providing the basis for our more conservative long-term revenue growth outlook versus management's guidance of "greater than 0%-5%" growth.
Despite these concerns, the stand-alone eBay should still maintain strong financial flexibility; including $8 billion in cash – $600 million after stripping out debt. As well as additional debt capacity, and we believe income-oriented investors may find eBay's capital-allocation activity attractive. We would also not be surprised to see other moves in the years to come, including the initiation of a dividend within the next several years or increased M&A activity such as technology- or geographic-related acquisitions or the possibility of a takeover by another large global player.