Why This Online Retailer Is A Great Buy

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Fourth-quarter revenue of eBay (NASDAQ: EBAY) climbed 18% year-over-year to $3.99 billion, helped by record holiday sales. That exceeded the average analysts’ estimate of $3.98 billion, reports Bloomberg.

The stock price has risen by almost 80% in the past one year. Increased mobile engagement fueled by “Marketplace” improvements led the company register unexpected revenue growth. I expect the momentum will continue and eBay’s stock will witness further gains in 2013.

Canaccord Genuity’s Michael Graham believes that eBay has substantial room for revenue growth.

"While at least some of the low-hanging fruit on the GMV tree has been harvested (improved search/product discovery, user growth driven by mobile) we believe there is still more room to go, both with existing programs (vertical shopping categories, third-party storefronts, product recommendation engine, customizable feeds) and unannounced but potentially logical ones (more comprehensive product availability)."

 Factors that will Drive eBay’s Future Revenue Growth

  1. Mobile Users: CEO of eBay John Donahoe said that he’s continuing his efforts to make sure users are buying on smartphones and tablets. Mobile users tend to complete purchases more often than those browsing on desktop computers. Mobile garners a quarter of new customers, drawing a younger demographic to the site, he said.
  2. Marketplace: The next round of growth is expected to come from the strong performance of eBay’s “Marketplace” business. “Marketplace” contributes slightly more than half of eBay’s total revenue. Traffic from mobile devices is the major contributor within marketplaces. With sellers now listing 2 million items per week from their smartphones on eBay, I expect the gross merchandise volume and the number of active users will continue to grow over the medium-term.
  3. PayPal: PayPal accounts for about 40% of eBay’s total revenue. The outstanding growth prospect of PayPal will lead to more revenue growth. This division registered decent growth of about 25% during 2012 with the international business outpacing overall growth. With PayPal still having a limited international presence, there is tremendous scope for further expansion.

Electronic Retail Expected to Replace Physical Retail

The rate of electronic retail shopping is expected to increase significantly over the next four to five years. To take advantage of this growing trend, retailers need to identify the best possible means of benefiting from the use of technology in shopping while implementing relevant strategies.

This growing trend has guided major U.S. retail chains to downsize their physical retail operations, and in turn, develop their e-commerce and m-commerce sites to attract customers.

Discount retail chains like Wal-Mart Stores (NYSE: WMT), Target (NYSE: TGT) and beleaguered consumer electronics retailer, Best Buy (NYSE: BBY) have announced that they will offer their patrons the facility to match the prices being offered at Amazon.com (NASDAQ: AMZN) and eBay.com.

These discount retailers have also resorted to a major redesign by developing the 'City Target' format, which aims at tapping the urban markets, where real estate remains a constraint. These stores are designed to fit in urban locations, both in terms of size and store design aesthetic.

By integrating the digital mode into the shopping experience, these retailers can earn rewards in the form of increased shopper demand and greater shopper loyalty.

M-Commerce Growth Positive for eBay

Research firm comScore reports that the numbers of U.S. smartphone users accessing retail content are increasing steadily. Amazon led all destinations with the highest unique visitors, followed by eBay and Apple. Wal-Mart led all traditional brick-and-mortar retailers with the maximum number of smartphone visitors, followed by Target and  Best Buy.

<img src="/media/images/user_14403/ebay_large.png" />

Relative Position: eBay vs. Peers

The EPS is growing steadily for eBay, with a flat PE multiple around 28. But for Amazon, despite the EPS declining consistently, its PE multiple is rising. Amazon’s skyrocketing revenue per share is fueling its stock price along with the PE. 

<img src="http://media.ycharts.com/charts/473444c3c1da7cb1cedeabb7c7fe0a74.png" />

EBAY EPS Diluted TTM data by YCharts

Amazon has recorded a huge 255.1% growth in revenue per share, while for eBay it has just started rising with 80.75%. For retailer giant Wal-Mart, it’s standing at only 42.71%, for Target it’s at 40.81% and for Best Buy, the specialty retailer, it’s slightly better with 52.56%.

<img src="http://media.ycharts.com/charts/c0ba7a7f1fc48031e0ebb3e88626d7c3.png" />

EBAY Revenue Per Share TTM data by YCharts

The Verdict

With eBay’s revenue showing signs of multiplying growth, I strongly feel that eBay’s stock is currently trading at the deep-value zone and will rise significantly over the medium-term. I would recommend buying the stock at the current price level.

Anindya7 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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