Advertising, Payments a Powerful Combo for eBay

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Shares of e-commerce leader eBay Inc (Nasdaq: EBAY) were up nearly 3 percent on Wednesday after a rare double upgrade from Morgan Stanley. Analyst Brian Nowak says the one-two punch of an expanding eBay payments business and a massive opportunity in advertising has the company on the brink of what could be a major long-term growth period.

According to Nowak, eBay will start intermediating its own payments this year as it weans itself off of its dependence on Paypal Holdings (PYPL). The company plans to transition away from Paypal completely by the end of 2020.

“We are bullish about this initiative, as we’ve seen other leading platforms observe higher user conversion/spend from more integrated/comprehensive payment offerings, which we now expect to be the case for eBay’s marketplace,” Nowak says.

Morgan Stanley estimates that the payments business alone could add $2.6 billion in revenue and $750 million in earnings before interest and taxes by 2021. However, the biggest growth avenue for eBay could be its fledgling advertising business. Nowak says eBay began meaningfully scaling its promotional listings business in 2017 and estimates that the advertising business can grow at a compound annual rate of about 110 percent from 2017 to 2020.

“This, too, may prove conservative, but even this implies eBay’s ad business reaches $450 million of 2020 high-margin incremental revenue,” Nowak says.

Between payments momentum and a booming ad business, Nowak says eBay could easily increase its long-term free cash flow by 60 percent over the next several years.

In the near term, eBay’s 2018 guidance is relatively optimistic, but Morningstar analyst R.J. Hottovy says it’s not unrealistic.

“Taking all factors into consideration, eBay’s 2018 guidance, including revenue of $10.9 billion to $11.1 billion, adjusted operating margins of 27 to 29 percent, adjusted EPS between $2.25 to $2.30 and free cash flow of $2.1 to $2.3 billion, strikes us as modestly aggressive but still achievable based on momentum across its core Marketplaces, StubHub, and classifieds platforms,” Hottovy says.

Morgan Stanley has upgraded eBay from “underweight” to “overweight” and raised its price target from $36 to $58. Morningstar has a “fairly valued” rating and $44 fair value estimate for eBay stock.

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