The FINANCIAL – Shares of eBay are climbing in advance of the company’s fourth-quarter 2018 results next Tuesday. But make no mistake: The e-commerce leader is under more pressure than ever to deliver the goods when its latest update hits the wires.
To be sure, Tuesday’s 6% rise came courtesy of multiple activist investors. Elliott Management, for one, leveraged its roughly 4% stake in eBay by issuing an open letter urging substantial changes in the name of creating shareholder value. Elliott’s ideas to that end range from operational improvements to increased capital returns and the separation of eBay’s StubHub and Classifieds businesses.
Meanwhile, fellow activist hedge fund Starboard Value also reportedly took a large stake in eBay, and plans to approach the company with similar suggestions in the coming days.
The timing is no coincidence given eBay’s impending quarterly report. If eBay is unable to demonstrate adequate progress toward driving growth and staving off the competition, it will only fuel the activists’ calls for change.
So for now, let’s take a closer look at where eBay stands today, as well as what we should expect from the company next week.
What to expect: eBay’s headline numbers
eBay’s latest guidance calls for fourth-quarter revenue between $2.85 billion and $2.89 billion, assuming organic growth of 4% to 5%. On the bottom line, that should translate to adjusted earnings per share of $0.67 to $0.69. Wall Street’s consensus estimates fall right at the midpoint of both ranges.
And judging by eBay’s initial 6% post-earnings pop last quarter, it seemed the market was pleased with what it had to say. But investors should also note that the climb only partially negated an even steeper decline leading up to eBay’s Q3 report. Shares fell 12% for all of the month of October as industry watchers worried eBay would need to end up implementing major strategic changes in an effort to keep pace with steep competition in the e-commerce space.
Digging deeper, looking forward
Indeed, eBay revealed plans to heavily shift the focus of its product and marketing investments toward acquiring new buyers, while simultaneously reducing its overall level of investment.
“We expect that this will result in slower growth for a period of time as we grow our user base and change the mix of customers,” explained eBay CEO Devin Wenig during last quarter’s call. “However, this will also allow us to deliver strong earnings growth over this period of time through operational margin expansion and ongoing aggressive capital return, while positioning the business for stronger growth in 2020 as payments and advertising continue to ramp.”
What remains to be seen, then, is exactly how much slower eBay expects its growth to be in the meantime — and that’s something on which investors should receive more color with eBay’s initial 2019 outlook next week.
For perspective, most analysts are modeling full-year 2019 sales of roughly $11.22 billion, which would mark relatively modest 4.5% growth assuming eBay achieves the $10.74 billion midpoint of its 2018 guidance. To eBay’s credit, the same predictions call for full-year 2019 adjusted earnings of $2.59 per share, which — just as Wenig indicated — would mark more impressive 12.6% growth from the $2.30-per-share midpoint of its current 2018 target.
Here again, however, it’s unclear that eBay will be able to appease its critics — particularly of the more recent activist-investor variety — even if it manages to meet or exceed these models. In order for eBay to prove it has what it takes to reaccelerate growth as it implements the aforementioned strategic shift, I suspect it will need to significantly over-deliver relative to expectations for both its holiday quarter and its forward outlook.