Why eBay is the Preferred Stock Over Lululemon in Today’s Market

Although eBay (NASDAQ: EBAY) and Lululemon (NASDAQ: LULU) operate in different sectors, we believe eBay represents a better investment option right now. Both companies generate approximately $10 billion in revenue annually and belong to the consumer cyclical sector. eBay’s stock trades at a price-to-sales ratio of 3.2x, while Lululemon’s is higher at 5.0x. We expect this valuation difference to favor eBay in the coming years. Below, we will explore several factors, including revenue growth, profitability, and valuation, to support our viewpoint.

Comparative Stock Performance

EBAY has outperformed LULU recently, climbing 45% from $45 in January 2021 to about $65 now. In contrast, LULU has only risen approximately 15%, moving from $350 to $405. For broader context, the S&P 500 index increased by nearly 60% over the same four-year span.

It is important to note that the performance of these stocks has fluctuated significantly. EBAY experienced a 34% gain in 2021, a dramatic decline of 36% in 2022, a modest 8% rise in 2023, and a robust 49% gain so far in 2024. Conversely, LULU recorded returns of 12%, -18%, 60%, and -22% in the corresponding years. Comparatively, the S&P 500 saw returns of 27% in 2021, -19% in 2022, and 24% in 2023, with 28% thus far in 2024. This shows that both stocks have struggled against the index during specific periods—EBAY in 2022 and 2023, while LULU underperformed in 2021 and 2024.

Many individual stocks have found it challenging to consistently outperform the S&P 500 recently, including major players in the Consumer Discretionary sector like Procter & Gamble, Amazon, and tech giants such as Google, Tesla, and Microsoft. However, the Trefis High Quality (HQ) Portfolio—a collection of 30 stocks—has outperformed the S&P 500 over the past three years due to better returns with reduced risk.

LULU Shows Strong Revenue Growth

EBAY’s revenue has grown at an average annual rate of 5%, increasing from $8.9 billion in 2020 to $10.3 billion currently. In sharp contrast, Lululemon’s average revenue growth rate of 30%—rising from $4.4 billion in fiscal 2021 to $10.2 billion—has been significantly more robust.

Recent revenue growth for eBay has been fueled by its focus on specific categories such as auto parts, collectibles, handbags, refurbished goods, and luxury fashion, all contributing to a higher gross merchandise volume (GMV). The company is also leveraging artificial intelligence to enhance sales through personalized recommendations. However, eBay faces stiff competition from companies like Amazon and Walmart.

Lululemon’s growth is mainly attributed to its impressive performance in China and other international markets, where sales surged by 67% year-over-year in 2023 and 39% so far this year. China now represents 13% of Lululemon’s total sales, an increase from 8% in 2021. Nevertheless, growth in its largest market, the Americas, has slowed to just 2% recently due to shifts in consumer spending and increased competition.

Looking ahead, analysts forecast high-single-digit average growth for Lululemon, primarily due to continued expansion in China, while eBay is expected to see growth in the low single digits.

LULU Demonstrates Stronger Profitability

eBay’s operating margin has decreased from 29.6% in 2020 to 19.2% in 2023. In contrast, Lululemon’s operating margin increased from 19.3% in fiscal 2021 to 22.9% in fiscal 2024. Over the last twelve months, Lululemon’s operating margin stands at 23.3%, outperforming eBay’s margin of 21.3%. Lululemon also compares favorably to competitors like Nike, which has an operating profit margin of 11.8%, and On Holding, at 9.2%. eBay’s recent decline in profitability stems from increased investments in research and development to enhance its offerings.

Evaluating Financial Risk

When examining financial risk, eBay appears to hold an advantage over Lululemon. eBay’s debt level stands at 25% of equity, slightly lower than Lululemon’s 26%. Furthermore, eBay boasts a cash reserve representing 45% of its assets, significantly higher than Lululemon’s 17%. This suggests eBay has a more favorable debt structure and greater financial flexibility.

The Final Decision: eBay Triumphs

While LULU has exhibited superior revenue growth and profitability, eBay edges ahead with a more stable financial position. eBay, trading at about $65, has a lower price-to-sales ratio of 3.2x compared to LULU’s 5.0x. Historically, eBay has traded at an average P/S ratio of 2.8x over the past three years, while LULU has averaged 6.7x during the same timeframe.

Given Lululemon’s cooling sales growth, which has dropped from around 30% in the last three years to a projected high-single-digit rate, its valuation multiple reduction seems warranted. Additionally, Lululemon faced backlash from its Breezethrough leggings launch earlier this year, leading to negative reviews and pulling the product from shelves. Competition within the athleisure market is also intensifying.

In conclusion, LULU’s current valuation near $400 appears inflated, while eBay offers potential for growth as it focuses on enhancing GMV through advanced AI strategies.

For further insights, consider how eBay’s Peers measure up in critical areas. Explore more valuable comparisons across various industries under Peer Comparisons.

[1] Returns as of 12/10/2024
[2] Cumulative total returns since the end of 2016

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.