The Ratings Game: Ebay shares sink 6% after weak guidance, but analysts say growth is on the way

EBay Inc. shares fell 6.2% in Thursday premarket trading after the company gave a soft outlook for the fourth quarter and full year, but analysts believe the online seller is in the early stages of a period of acceleration.

EBay

EBAY, +1.28%

  expects fourth-quarter revenue between $2.58 billion and $2.62 billion compared with a FactSet consensus of $2.60 billion. Earnings are expected to be in the range of 40-to-45 cents per share and adjusted EPS is expected to be in the range of 57-to-59 cents. The FactSet estimate is 59 cents.

The full-year revenue outlook is between $9.53 billion and $9.57 billion. EPS guidance is for a range of $1.85 to $1.90 and the adjusted EPS outlook is in the range of $1.99 and $2.01. The FactSet consensus is for revenue of $9.54 billion and EPS of $2.01.

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“We believe eBay’s focus on high-inventory resellers, a shift away from out of season product sales and renewed focus on user interaction through improved search and category-specific redesigns should lead to long-term revenue growth,” Benchmark analysts wrote in a note. “We suspect our estimate for 65% year-over-year growth in revenue in 2018 could prove conservative but acknowledge the recovery will take time, especially in the face of continued FX headwinds and a carefully planned overhaul of the site to support structured data.”

Benchmark rates eBay shares buy with a $45 price target.

Susquehanna Financial Group analysts led by Shyam Patil called the fourth-quarter EPS guidance “conservative” and believe it will pressure shares in the near-term. But now is a good time to take advantage.

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“Accelerating core marketplaces gross merchandise volume growth, stable-to-improving buyer trends, progress with structured data, and continued traction with brand marketing show that the turnaround is on track,” the Susquehanna note said. “As we have mentioned before, our positive thesis will take time to fully play out, but the solid free cash flow, strong capital returns (as evidenced by the ̴$900 million buyback in Q3), and improving growth rates provide meaningful upside to current levels with limited downside risk.”

Susquehanna’s price target for eBay is $41.

SunTrust Robinson Humphrey analysts headlined their eBay note “Steady but Slow Progress on Turnaround.” But they emphasize the challenges that eBay faces.

“[C]hanges in consumer shopping habits and rapid evolution in commerce favoring omnichannel offerings put eBay at a disadvantage, if not addressed,” SunTrust wrote.

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Analysts there, as well as elsewhere, note StubHub’s struggles, with SunTrust saying the ticket-selling channel is impacted by tough comparisons and a “weak events calendar.”

However, a turnaround for eBay as a whole is likely on the horizon.

“Arguably, a broader exposure of the enhanced experience supported by an aggressive marketing initiative should contribute to faster gross merchandise volume and revenue growth over time, but this outcome has taken longer than we expected,” the note said.

SunTrust rates eBay shares hold with a $38 price target.

Ebay reported revenue of $2.41 billion, up from $2.22 billion last year and ahead of the $2.37 billion FactSet consensus. EPS was 48 cents, up from 36 cents last year, in line with the FactSet estimate.

Gross merchandise volume was $21.7 billion, up 8% on an as-reported basis.

EBay shares are up 2.4% for the last three months and up nearly 28% for the year so far. The S&P 500 index

SPX, +0.07%

  is up 14.4% for 2017 to date and the Dow Jones Industrial Average

DJIA, +0.70%

is up 17.2% for the period.