Something exciting happens with e-commerce giant eBay Inc. (NASDAQ :). The shares have risen more than 30% this year, better than both the benchmark and the much bigger rival Amazon.com (NASDAQ :). The shares rose from $ 28.07 on December 31 to $ 37.25 by closing yesterday.
This revival comes after the slump of last year that the shares of eBay fell by more than 40% between February and December. The renewed excitement of investors about eBay, however, has little to do with the profits of the company. It comes at a time when the company is showing slow growth, and on January 29 a disappointing expected turnover for the current year.
Daily map of eBay
The reason why eBay is becoming more and more interesting to follow is a growing expectation that two activist investors, who have recently built significant interests in the company, will insist on changes that unlock future value.
The two investors, hedge fund managers Elliott Management Corp. and Starboard Value LP, want the online marketplace to consider selling or shifting some parts of the business and giving back more capital to investors as a way to break out of their torpid growth phase.
Billionaire Paul Singer's Elliott Management sent a letter to the eBay board at the end of January, proposing a five-step plan to turn the company around. Elliott, who reportedly owns more than 4% of eBay, proposes to turn off StubHub, eBay's ticket marketplace and its classified business.
And it looks like the board is listening. On January 29, eBay announced for the first time to pay out a dividend – $ 0.14 per share per quarter – and added $ 4 billion to the share buyback plan. Combined, this will return a total of $ 5.5 billion to shareholders this year.
Great plan but challenging environment
It is no secret that eBay needs a solid strategy to impress investors. When Amazon's biggest rival showed staggering growth in the decade, eBay had no direction and could not accelerate its expansion into the core business of the Marketplace
The company, which pioneered e-commerce, reported only 5% growth in gross trade volume in the most recent quarter for its marketplace activities, a sharp slowdown compared to the year-ago period. In fiscal year 2019, eBay is expected to generate just $ 10.86 billion in sales, compared to $ 275 billion from Amazon for the same period.
That said, there is no doubt that eBay has a great brand and that brand will not disappear. If activist investors can implement the reform agenda that they have proposed for eBay, the company's shares can be a good turnaround bet for patient investors.
But in our opinion there are also risks for this approach. The e-commerce landscape is becoming increasingly competitive, with the major brands spending a lot to keep their customers on their own platform.
Some of the world's largest retailers, including Walmart (NYSE 🙂 and Target (NYSE :)), have been able to grow their online activities over the past year and that trend is unlikely to stop. In this macro-background it will not be easy for eBay to sell everything else and "expand the universe of what is being traded on its Marketplace", a simple solution proposed by Elliott Management.
Bottom Line
For long-term investors, eBay shares offer the opportunity to earn revenue with a solid brand, now that the company has initiated its dividend program. By increasing eBay's money returns, the company enters an adult business cycle and leaves its fast-growing path.
With that perspective in mind, we think that eBay is still a good bet, even if its activist investors fail to roll their plan quickly.
