eBay’s Q3 off to a strong start as Baird reaffirms ‘Outperform’ rating, but is it time to invest?

Baird’s reaffirmation of its “Outperform” rating on eBay Inc. (NASDAQ: EBAY) underscores the investment firm’s continued confidence in the online marketplace giant. 

With a price target of $62.00, Baird projects a potential upside of approximately 9% from eBay’s current trading price. 

This endorsement follows an encouraging analysis of eBay’s transaction data for July, which showed slightly better month-over-month growth than historical averages. 

While Baird remains optimistic, they are cautiously awaiting the impact of the back-to-school season and early holiday trends before making any further adjustments.

eBay’s Q2 performance:

In the second quarter of 2024, eBay delivered a mixed performance that combined positive surprises with lingering concerns. 

The company reported $1.18 per share on revenues of $2.6 billion, surpassing consensus estimates of $1.12 per share and $2.53 billion, respectively. 

However, the number of active buyers remained stagnant at 132 million, raising some eyebrows in the market. 

Gross Merchandise Volume (GMV) increased by 1% to $18.42 billion, exceeding expectations of $18.09 billion.

Can eBay maintain its competitive edge?

Despite these positive results, eBay faces significant challenges maintaining its competitive edge. 

The company has made notable strides in sustaining revenue through strategic initiatives, such as expanding focus categories like luxury goods and refurbished items and boosting advertising revenue. 

However, eBay’s user base has been declining, and it faces intense competition from giants like Amazon and Alibaba, as well as niche players like Etsy.

eBay’s stronghold in the secondhand market remains intact, but its reputation for quality and innovation trails behind its competitors. 

The stagnation in active user growth is a particular concern for the company’s long-term prospects, though eBay has managed to sustain revenue growth through increased take rates and a focus on high-value categories.

One of eBay’s recent growth drivers is its ability to adapt to the evolving e-commerce landscape. 

The company has introduced new AI-driven features, such as the “Shop the Look” tool for fashion buyers, and expanded its refurbished product offerings. 

Additionally, strategic moves like acquiring Goldin from Collectors and partnering with Venmo are enhancing the customer experience and attracting a broader audience. 

However, the sustainability of these growth drivers is uncertain, especially as competition intensifies.

eBay trading at forward P/E ratio of 11.8x

From a valuation perspective, eBay is currently trading at a forward P/E ratio of around 11.8x, which may seem appealing to some investors. 

However, this valuation does not appear particularly compelling when considering the company’s limited growth prospects and declining user base. 

While eBay’s free cash flow and dividend yield offer some comfort, the lack of significant improvements in user engagement and GMV growth may hinder the stock’s ability to deliver meaningful returns.

eBay’s management has taken steps to return value to shareholders, including a $1.1 billion return in Q2 2024 through share repurchases and dividends. 

The company also completed the sale of its Adevinta shares, further strengthening its balance sheet. 

Despite these positive actions, concerns remain about eBay’s ability to sustain these capital returns in the long term, particularly given its net debt position and flat GMV growth outlook for Q3.

Looking ahead, eBay’s ability to maintain its market position will largely depend on continued innovation and adapting to changing consumer preferences. 

While the strong start to Q3 and positive Q2 results offer some optimism, the sustainability of these trends remains uncertain.

Approaching resistance

eBay’s stock experienced a significant decline, dropping from over $80 to below $40 between October 2021 and October 2022.

Throughout most of 2023, the stock remained confined within a narrow trading range of $40 to $50. However, it began an uptrend earlier this year following the company’s Q4 2023 financial results in February, and it continues to show bullish momentum on the medium-term charts.

Source: TradingView
The bullish outlook is likely to persist as long as the stock stays above its 200-day moving average, which is currently around $48.3. Investors considering new long positions may find an entry point near $55, with a trailing stop loss set just below the 200-day moving average to manage risk.

While the stock is showing strength, it is also approaching a critical resistance level above $60. Traders with a bearish perspective should consider waiting until the stock moves above $58 before initiating a short position, with a stop loss placed at $60.4. If the stock fails to break through the $60 level, it could retreat below $50, providing an opportunity to book profits.

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