We believe that the internet retail company eBay (NASDAQ: EBAY) is currently a better pick over the apparel retail company, Lululemon stock. Although these companies are from different industries, they belong to the consumer cyclical sector and share a similar revenue base of around $10 billion. EBAY stock trades at 3.2x trailing revenues, versus 5.0x for LULU. We think this gap in valuation will narrow in favor of EBAY in the coming years. There is more to the comparison, and in the sections below, we discuss why we think EBAY will outperform LULU in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation. Separately, check out What’s Behind The 80% Rise In META Stock?
EBAY stock has fared better than LULU
EBAY stock has seen gains of 45% from levels of $45 in early January 2021 to around $65 now, vs. an increase of about 15% for LULU stock from $350 to $405. This compares with 60% gains for the broader S&P 500 index over this four-year period.
However, the increase in these stocks has been far from consistent. Returns for EBAY stock were 34% in 2021, -36% in 2022, 8% in 2023, and 49% so far in 2024, while that for LULU stock were 12%, -18%, 60%, and -22%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 28% so far this year — indicating that EBAY underperformed the S&P in 2022 and 2023, and LULU underperformed the S&P in 2021 and 2024.
In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including PG, and AMZN, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 the last 3 years over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
LULU’s revenue growth has been superior
eBay has seen its revenue rise at an average annual rate of 5% from $8.9 billion in 2020 to $10.3 billion now. On the other hand, Lululemon’s average revenue growth rate of 30% from $4.4 billion in fiscal 2021 (fiscal ends in January) to $10.2 billion now has been comparatively much faster.
eBay’s revenue growth lately has been driven by growth in its focus categories, which includes auto parts and accessories, collectibles, handbags, refurbished goods, and luxury fashion. This has helped it see higher gross merchandise volume and take rate over the recent quarters.
The company has been targeting AI to bolster its sales by offering personalized recommendations. Its focus on certain categories, such as auto parts and accessories, seems to be working well for the company. Still, eBay faces tough competition from the likes of Amazon, Walmart, Etsy, and Temu, among others.
Lululemon’s revenue growth lately has been driven by strong growth in China and international markets. For perspective, China sales were up a whopping 67% y-o-y in 2023, and another 39% so far this year. China now accounts for 13% of the company’s total sales, versus 8% in 2021. However, the company’s largest market – the Americas region – is seeing tepid growth lately, up just 2% for the nine-month period ending October 2024. This can be attributed to a change in consumer spending trends and rising competition.
Looking forward, we expect Lululemon to see a high-single-digit average growth rate in the coming years, led by continued growth in China, versus a low single-digit rate for eBay.
Also, LULU is more profitable
eBay’s operating margin fell from 29.6% in 2020 to 19.2% in 2023, while Lululemon’s operating margin expanded from 19.3% in fiscal 2021 to 22.9% in fiscal 2024. If we look at the last twelve-month period, Lululemon’s operating margin of 23.3% fares better than 21.3% for eBay. Lululemon’s profitability is superior compared to some of its peers, including Nike, with operating profit margin of 11.8% and 9.2% for On Holding. For eBay, the decline in profitability lately can be attributed to increased spending on R&D to improve its product experience.
What about financial risk?
From a financial risk perspective, eBay seems to have an edge over Lululemon. Its 25% debt as a percentage of equity is slightly lower than 26% for Lululemon, while its 45% cash as a percentage of assets is much higher than 17% for the latter. This implies that eBay has a better debt position and has more cash cushion.
The verdict – EBAY’s the winner
We see that LULU has seen better revenue growth and is more profitable. On the other hand, eBay has a better financial position. Now, looking at valuation, we think EBAY is the better choice of the two. EBAY, at its current levels of $65 trades at 3.2x trailing revenues, versus the stock’s average P/S ratio of 2.8x over the last three years.
In comparison, LULU stock trades at 5.ox trailing revenues, versus the stock’s average P/S ratio of 6.7x over the last three years. However, for LULU, a decline in valuation multiple seems justified, given the slowing sales growth from around 30% average rate in the last three years to a high single-digit expected growth rate in the next three years. The company also faced a backlash after the launch of Breezethrough leggings, with a V-shaped back seam, earlier this year. The product received negative reviews at large, and the company decided to pull the product from the market. Lululemon also faces increased competition in the athleisure market.
Overall, we think LULU stock is overpriced at levels of around $400, while EBAY may offer some room for growth in the coming years, as it focuses on improving the GMV using generative AI capabilities.
While EBAY may outperform LULU in the next three years, it is helpful to see how eBay’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Invest with Trefis Market Beating Portfolios
See all Trefis Price Estimates