There are really only three ways that investors can make money from share trading. One is to bet on the share price rising or falling, the second is dividends and the third is to break a company up and sell off the assets. eBay’s performance has now been brought into question twice – the first time when PayPal ended up being spun off and now for the second time where activist investors have suggested spinning off StubHub and eBay Classifieds.
Betting on share prices can be done the traditional way by buying shares and holding them realising a profit when the shares are eventually sold, or by agreeing to buy shares at a future date and a future price and gambling that when you come to fufill the contract the share price will have risen of fallen in your favour.
Dividends, which eBay have started to pay for the first time this year attracts a different type of investor. Typically when a company’s share price is rising fast – often a start up fast growing company – there are enough investors happy to profit from increased share value. There is another pool of investors who will only invest in a company that pays a regular dividend – often pension companies for example – and they are more interested in a regular drip feed of funds than massive increases in the share price. By starting to pay dividends eBay performance resulting in share price increases is (still important but) less critical and the dividends start to be the real attraction.
The problem with eBay’s performance is that their share price hasn’t risen and they’ve only just started to pay dividends. This is what’s attracted investors who feel that value could be unlocked by splitting the company up and letting the different business units stand on their own merits. This could be be selling the units to potential suitors or (more unlikely with StubHub and eBay Classifieds than was the case with PayPal) floating them as separate companies on the stock exchange.
When you look at eBay’s performance today and compare it with PayPal you can see why investors are unhappy. Prior to the PayPal split, eBay shares were around $27 in value. When the companies parted ways eBay investors were awarded one PayPal share for each eBay share they held – effectively valuing eBay and PayPal at par. Following the split PayPal shares traded at around $40, while eBay shares sat still around $27.
Today eBay’s performance has seen their share price rise to around £38 while PayPal performance has seen their share price rocket to around $107. Investors simply don’t see the value in buying eBay shares as eBay’s performance hasn’t justified returns. It’s too early to say whether eBay’s performance from a dividend perspective will make their shares more valuable to investors interested in regular returns rather than future share price rises as they are only about to issue their second ever dividend.
It’s eBay’s performance, or lack of, from an investor point of view that has resulted in activist investors calling for the company to be split up yet again. We aren’t hearing about investors wanting to split up PayPal.
Lessons for sellers from eBay’s performance and strategy
None of this of course is of much interest to eBay sellers, those who make their living selling on eBay are much more interested in the marketplace performance than they are in the share price value. Underlying everything investors are interested in however is how the marketplace prospers as sellers making healthy profits generates fees for eBay and growth is one metric investors want to see.
Profits (fees from sellers) is another but eBay has probably gone as far as they can in bleeding money from their sellers. Eventually there comes a day when a seller looks at their margins and decides if it’s still profitable to sell on eBay or if they’re simply turning over stock without the profits to make it a worthwhile exercise. Even eBay themselves have decided to cut back on marketing funds when it resulted in turnover but was simply subsidising GMV. Sellers also don’t want to subsidise GMV without profits.
eBay are rationalising their business and have set an expectation to investors that they will grow revenues in the short term without significantly growing GMV. Sellers would be wise to do likewise and look to maximise their revenues on eBay even if this means contracting their selection and focussing on products with high margins and perhaps if fees including Promoted Listings are too high simply ceasing to sell unprofitable lines.