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eBay Inc Downgraded Following Paypal Holdings Inc Spinoff

eBay completed the spinoff of PayPal in July, and now more than a month after that, analysts are starting to get a full picture of what the separated business looks like. The concern has been that eBay may not be able to stand on its own without PayPal, and it appears as if that concern is setting in more deeply now that the two businesses are apart.

eBay Inc Downgraded Following Paypal Holdings Inc Spinoff

eBay separates from its best business

PayPal was eBay’s crown jewel for years as growth was mostly noted in the payments business while eBay Marketplaces struggled. The good news for eBay is that its Marketplaces business has finally stabilized, although growth still seems a remote possibility.

As a result, Cantor Fitzgerald Youssef Squali and his team downgraded eBay from Buy to Hold and introduced a price target of $27 per share for what’s left of eBay. Their previous price target was $72 per share. They had raised their target to $60 per share immediately after the PayPal spinoff, which means they’ve been quite busy lately in changing their targets on eBay.

Stabilization in eBay Marketplaces

Of course the first step in turning around a business is stabilizing that business, and Squali believes eBay management has succeeded in doing this. Steady growth remains just out of reach however, as July and August same store sales data suggests growth in only the low- to mid-single digits year over year. By comparison, the e-commerce industry as a whole is growing by 15% to 20%.

Growth in U.S. gross merchandise volume averaged 2% to 3% over the last three quarters. In international markets, eBay clocked a growth rate of 6% to 8% in gross merchandise volume. In the first quarter of 2014, the company managed an 11% growth rate in volume. In July, same store sales data from ChannelAdvisor indicated a 5.8% growth rate, and in August, growth was recorded at 3.4% year over year.

Amazon is killing eBay in merchandise volume growth as it recorded a growth rate of 30.1% in July and 24.7% in August. eBay management doesn’t expect to see growth in merchandise volume any time soon, as they guided for between 3% and 5% growth on a neutral currency basis this year and 0% to 5% growth next year.

Why the downgrade for eBay?

The Cantor Fitzgerald team moved to the sidelines on eBay because they want to see signs of stronger growth before they get back into the game on the online auction company. They are particularly concerned about the flat performance of eBay’s Fixed Price format sales in August, which was down from the 5.2% growth in July, and the 31.1% and 33.4% declines of Auction sales

The analysts noted that eBay is currently making progress in its turnaround efforts by investing in a number of different areas like machine learning, merchandising and structured data. The goal is to improve search rankings and the quality of the products available on its platform and increase user engagement. These growth initiatives are expected to be pushed out over the next 18 to 24 months, but eBay’s turnaround could take a while because it’s unclear how long it will take for these initiatives to actually spur and sustain significant growth.

The challenges continue for eBay

eBay has faced several challenges which can be blamed for its weak growth. Google changed its search algorithms a while back, and the online auction company has yet to recover. The algorithm change has weighed heavily on eBay’s user growth rates, as the company saw only a 5% increase in users in the second quarter, compared to about 14% in last year’s second quarter.

One thing the Cantor Fitzgerald team may not be taking into consideration is that their initiatives to improve search rankings right now may become obsolete because Google is known for constantly changing its search algorithms.

Recovering eBay’s past search success will be a tall order because the company will have to be continually adapting to every change Google makes and even anticipate changes in order to keep from being so negatively impacted with each algorithm change. The problem is that as soon as eBay “fixes” its search rankings, it may have to start fresh to try to fix them again not much later.

eBay management may be anticipating this, as they see double-digit growth in merchandise volume as being a long-term goal, signaling that the turnaround process will take quite a while to come to fruition.

eBay also recovering from data breach

Past users also seem hesitant to return to eBay as well because of the massive data breach earlier this year. The Cantor Fitzgerald team believes this could continue to be a problem until the company makes progress in fixing the SEO problem.

As of this writing, shares of eBay were down 0.57% at $26 per share.