Barclays Downgrades eBay, Says Buybacks Are Not Enough

Barclays have downgraded eBay Inc (NASDAQ: EBAY) to Underweight, citing lack of fundamental improvement, sending the shares of the e-commerce company down by 1.5 percent in the pre-market hours.

"We believe fundamentals continue to be weak, share repurchases may not be enough and within the confines of large cap Internet sector, we see more upside in most of the other stocks within our coverage universe," analyst Paul Vogel wrote in a note to clients.

Within the context of the split from Paypal Holdings Inc (NASDAQ: PYPL), Vogel stated, "Many investors believed in a simple narrative for eBay – steady growth in revenue, increasing margins and capital returns to shareholders."

"Currently we only see one of the three legs as likely over the next few quarters, capital returns, and see fundamental improvement lacking," Vogel added.

Looking Forward With eBay

"While eBay margins are 600–1,000 bps below historical levels, we don't see the company managing the business to return to growth in margins. Without revenue growth, which has yet to really materialize, profit upside is very limited," Vogel said.

Related Link: Time To Buy Amazon And eBay?

Vogel, who has a $25 price target on eBay shares, compared the situation to Viacom, Inc. (NASDAQ: VIAB) stock, which split from CBS Corporation (NYSE: CBS) in early 2006. In Viacom's case, "investors were initially enthusiastic about the potential for modest fundamental improvements and significant share repurchases which would lead to stock outperformance."

"We fear eBay has a similar setup where investors believe that significant share repurchase potential provides upside to the name but it ignores the lack of momentum at the core turnaround. The parallel isn't perfect, ecommerce is a secularly growing business and traditional media is not, but the basic set-up is similar and we worry that buybacks alone aren't enough," Vogel highlighted.

However, the analyst isn't questioning the current strategy of eBay; he said, "Improving the technology back-end and better indexing the site through structured data should improve eBay."

"The initiatives should be a start to rebuilding growth from search and other sources, issues that have significantly impacted eBay over the past year; it will just take time," Vogel added.

Shares of eBay closed Monday's regular trading at $24.12 and were down 1.5 percent in pre-market trading Tuesday.

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