eBay's (NASDAQ: EBAY) stock is on fire in 2021. Investors are showing favor to its asset-lite business model, which has experienced a surge in customers and spending since the pandemic.
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Customers flocked to eBay
Like many other online platforms, eBay's business surged during the pandemic. From fourth-quarter 2019 to fourth-quarter 2020, active buyers increased by 11 million to reach 185 million. What's more, customer interest sustained even through economic reopenings in the first quarter of 2021, and eBay reached 187 million active buyers at the end of Q1.
It may be too soon to tell, but it looks like customers who joined during the pandemic are going to stick around for a while. eBay's platform gives buyers access to a unique mix of new and used items. You can simultaneously buy a new case of baby diapers and a used smartphone. Item selection and price savings are the twin pillars that attract buyers to eBay.
The organic customer interest during the pandemic allowed eBay to pull back promotional spending. Before the pandemic, I would regularly receive a promotional offer from eBay for 20% off my entire order with a max discount of $100. Additionally, I would sometimes receive $15 off any order of $75 or more. However, since the pandemic onset, these went away.
Reducing promotional spending allowed eBay to increase its transaction take rate, the amount of revenue eBay gets from a transaction, from 9% in Q4 2019 to 10% in Q1 2021.
Moreover, eBay leaves fulfillment and logistics for sellers to handle. The strategy is becoming a competitive advantage lately as several factors, including a shortage of truck drivers, have led to a rise in shipping costs.
Earnings can sustain at elevated levels
eBay recently closed the sale of Adevinta, which brought in $2 billion in cash. The development led eBay to raise its target for share buybacks this year from $2 billion to $5 billion. Furthermore, it entered an agreement to sell its businesses in Korea for $3 billion. Investors are cheering the sales because they will allow eBay to focus on its core business.
In all, the rise in active buyers, a decrease in promotional activity, and billions in share buybacks will go a long way in sustaining eBay's earnings per share (EPS). Still, management is guiding investors that EPS will decrease in the second quarter. However, that is more a result of tough comparisons from the same quarter last year.
The expected dropoff from pandemic-boosted earnings levels could be one reason why eBay's stock can be had at a relatively inexpensive forward price-to-earnings ratio of 17.7. So despite the run-up of eBay's stock price in 2021, there is room for it to go even higher from here.
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Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool recommends eBay and recommends the following options: short June 2021 $65 calls on eBay. The Motley Fool has a disclosure policy.
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