E-commerce and auction site eBay (NASDAQ: EBAY) is on fire in 2021. The company gained a record number of customers at the start of the pandemic as people avoided shopping in person.
eBay is using this momentum to optimize business performance. Management expects that many buyers who signed up during the pandemic will not stay long term, so their focus is on retaining high-value customers. It’s one of the few things investors should know about eBay as stocks soar.
Make the most of it
At the start of eBay’s second-quarter 2020 pandemic, the company added seven million active buyers, the most in its history. eBay continued to add buyers throughout the following year, but this trend reversed in the last quarter. Economic reopenings have led consumers to spend more time away from home. Unsurprisingly, fewer buyers turned to eBay, and as a result, the company lost seven million active buyers between Q1 and Q2 of 2021.
Still, with 159 million active buyers, they are up 3% from the same quarter in 2019. Additionally, eBay has made some changes to its promotional activity to target higher value customers, as the total number decreases, the quality of buyers has improved. Here’s what management said about it on the last earnings conference call:
At the same time, we abandoned the old tactics that led to low value, infrequent or one-off buyers. Our buyer base is starting to evolve based on this strategy. These high volume buyers are growing from a year ago, and their eBay spend is growing even faster. This mix of better quality buyers increases value for sellers and will lead to better health of our ecosystem in the long run.
Indeed, while eBay has lost active buyers overall quarter over quarter and year over year, it has gained high value buyers who have also increased their spending over the period. These VIP customers represent 20% of total eBay buyers, but represent 75% of the total value of purchases. This is in stark contrast to low value buyers who account for half of the total but only contribute 5% to the gross volume of goods. This new direction will be crucial for the company, as it generates revenue by taking a percentage (the take rate) of the overall volume of transactions on its platform.
eBay has also migrated its buyers and sellers to its own payment system. The transition helps streamline the sales process and reduce the lead time when buyers make a purchase and pay.
The combination of reduced promotional activity and payments migration pushed eBay’s turnout to 11.3% in the second quarter, from 9.2% a year earlier.
What this could mean for investors
These latest changes may improve eBay’s long-term profitability, increasing what has already been an excellent operating margin over the past decade.
The market seems impressed as eBay shares have gained 45% so far this year. Management is confident enough in its outlook to increase its share buyback target for this year from $ 2 billion to $ 5 billion. Savvy investors should take note and put eBay on their list of stocks to watch.
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