A faster-than-expected deterioration of eBay’s marketplace is likely to cap any future stock gains, according to Morgan Stanley, which downgraded the equity to equal weight on Wednesday.
“EBay’s core marketplace business has grown gross merchandise value slower than expected in all three quarters since we upgraded the name in April and is now expected to grow low to mid single digits in 2019,” analyst Brian Nowak wrote in a note. “Despite nascent earnings opportunities (payments, advertising) and a greater focus on efficiency in ’19, we expect slowing GMV growth to weigh on eBay’s multiple.”
Nowak also cut his 12-month discounted cash flow price target on shares of the online marketplace by 40 percent, to $33 from $55. The stock closed Tuesday at $29.05. Notwithstanding the price target cut, Morgan Stanley’s 2019 GAAP earnings per share estimate remains above Wall Street consensus at $2.09.
“We under-estimated how quickly core marketplaces would deteriorate: We were wrong in double-upgrading eBay,” the analyst wrote. In a rare move, Morgan Stanley upgraded eBay on April 8 from underweight to overweight, predicting stronger stock returns and a slower deterioration to the online marketplace.
Since then the stock has fallen more than 25 percent. Shares of eBay fell 1.8 percent in premarket trading Wednesday following the Morgan Stanley downgrade.
Morgan Stanley sees eBay’s domestic gross merchandise value growing between 0 and 1 percent in the first half of 2019 and just 2 percent for the whole year.
“While our rough 2 percent 2019 U.S. GMV growth could be conservative if eBay can execute better, our work shows how U.S./Total GMV will likely need to grow 3 percent or more in order to give the stock 30 percent upside from current levels,” Nowak added. “This, in our view seems a low probability, particularly while cutting back on marketing spend to focus on profitability over growth and as e-commerce competition from large retailers and other marketplaces continues to increase.”
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