On Wednesday Morgan Stanley’s Brian Nowak downgraded eBay’s stock to equal weight and cut its price target by 40 percent.
In the note to investors, Nowak said:
“EBay’s core marketplace business has grown gross merchandise value slower than expected in all three quarters since we upgraded the name in April and is now expected to grow low to mid-single digits in 2019”
“Despite nascent earnings opportunities (payments, advertising) and a greater focus on efficiency in ’19, we expect slowing GMV growth to weigh on eBay’s multiple.”
“We underestimated how quickly core marketplaces would deteriorate: We were wrong in double-upgrading eBay.”
“While our rough 2 percent 2019 U.S. GMV growth could be conservative if eBay can execute better, our work shows how U.S./Total GMV will likely need to grow 3 percent or more in order to give the stock 30 percent upside from current levels.”
“This, in our view seems a low probability, particularly while cutting back on marketing spend to focus on profitability over growth and as e-commerce competition from large retailers and other marketplaces continues to increase.”
What Does This Mean?
Nowak’s original 12-month price target for eBay was $55, but now he places it at $33, a 40 percent change.
The stock closed on Wednesday below $30, so Nowak sees little growth in the company.
He highlighted concerns sellers already have with eBay. The company shifted brand and off-line advertising to mostly discounts and email campaigns.
Compare this to Etsy; The unique products marketplace is expanding branding and offline advertising, especially during the holiday season.
Nowak is also concerned about sales growth as many sellers often have pointed out. It seems eBay is changing areas such as payments to increase revenues, but those changes are not enough to deal with a declining market share in eCommerce.
eBay also spent 2018 “right sizing” its workforce, which means lower overhead expenditures.
It seems while eBay will continue to generate expected profits; the company is doing this by changing up the revenue mix and reducing costs.
While others such as Amazon and Walmart continue to expand their eCommerce sales (GMV) at record levels, eBay’s GMV is showing minimal growth.
Especially troubling is Nowak’s quote, “We underestimated how quickly core marketplaces would deteriorate…”
He is referring to the core marketplace product that most sellers use; ebay.com and the various company branded marketplaces.
eBay’s own StubHub showed great growth over the last year and other more specialized marketplaces like Etsy also increased GMV significantly.
There is a case here that marketplaces work best now if they are specialized operations, instead of trying to compete with general merchandisers such as Amazon and Walmart.
Without a significant logistics operation that can bring consistent 2-day or faster delivery experiences to consumers, eBay’s role as a mass merchandise marketplace may be in serious trouble.
eBay’s “Amazonification” relies on the idea that sellers around the country offer the same merchandise and the company uses sellers as its “warehouses locations”.
In other words, it is managing delivery expectations by showing products to shoppers from sellers that are closest to their location.
Another strategy eBay appears to be using is forging relationships with major brands to sell excess stock or discontinued models and styles. Effectively this seems to put eBay on a path to become the online version of “outlet malls”.
There is no shortage of seller complaints about the changes eBay is making.
READ MORE: eBay Surprises with 2018 Q3 Earnings Beat
With over two years into this strategy, it seems if this is truly the future of eBay, the company’s core marketplace GMV should be much better.
Wall Street’s patience with eBay may come to an end too.
The stock has fallen over 25 percent YTD and this investor note from one of the largest Wall Street firms is a sign that Wall Street is noting the lack of GMV growth.