Upside and Downside Scenarios for eBay on Holiday Shopping Trends
eBay (NASDAQ:EBAY), which competes with other e-commerce sites like Amazon (NASDAQ:AMZN), Wal-Mart (NYSE:WMT), Overstock (NASDAQ:OSTK), and Blue Nile (NASDAQ:NILE), has instituted advertising campaigns to cash in on the holiday season. [1] Over the past year, the company has launched initiatives like Fashion Outlet and the eBay Bucks rewards program (See our analysis on how eBay Bucks program could reward shareholders as well).
Fashion Outlet is a program that enables premium brand names to sell clothing, shoes, etc. with minor production defects at a substantial discount. It remains to be seen, however, whether the increased advertising spend from a new ad campaign can help eBay generate more sales from its Fashion Outlet, or if it will simply add to operating expenses with little benefit to revenues.
eBay’s Marketplaces business segment constitutes about half of the $31.33 Trefis price estimate for eBay’s stock, which stands roughly 13% higher than the current market price.
Online Holiday Shopping Growth Trends are a Positive for eBay
The early trends indicate that online holiday shopping grew at a faster rate than initially anticipated. Comscore previously forecasted that the holiday online shopping spending would increase by 11% during November-December 2010 over the same period in 2009, [2] but ultimately upped this number to 13%. [3]
Can eBay’s Stock Gain?
Upside – Listing-to-Sales Conversion Rate
The faster holiday online shopping growth should definitely benefit eBay, as new advertising campaigns position the company to attract more buyers to its site. As online shopping accelerates, the ability to attract new buyers could lift eBay’s listing-to-sales ratio.
Listings-to-sales conversion rate represents the percentage of items for sale listed on eBay that are actually sold. We estimate that the conversion rate has declined slowly from 42% in 2006 to 39% in 2009. Past declines in this metric were partially due to the recessionary environment that forced customers to cut down on spending. With improving macro conditions, we expect this ratio to stabilize at around 39% in the future.
There could be an upside of 5% to our estimate for eBay stock if this ratio increases to 44% by the end of Trefis forecast period, instead of the 39% included in our base case projections.
Downside – Marketplace EBITDA Margin
Increased advertising spend could also pose the risk of higher operating expenses and, correspondingly, lower margins. eBay’s Marketplace EBITDA margin has declined from an estimated 44% in 2007 to 31% in 2009, and we anticipate a moderate recovery to around 36% by the end of the Trefis forecast period.
eBay’s recent Marketplace EBITDA margin declines have been largely caused by the recessionary economic environment that led to lower merchandise pricing and reduced commissions for eBay. With improving macroeconomic conditions, we expect margins to improve.
However, there could be a downside of 5% to our estimate for eBay stock if increased advertising spend leads to stagnant EBITDA margins at around 31% over the Trefis forecast period. We note that this scenario would still leave our estimate ahead of current market price.
See our full company breakdown and estimates for key drivers to eBay’s stock value in the display below.
You can see the complete $31.33 Trefis Price estimate for eBay stock here.
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