Is eBay Cheap Now?

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

eBay (NASDAQ: EBAY) has enjoyed quite a sweet rise for the past 4 years. Since the beginning of 2009, the share price has increased from $10.50 per share to $54.39 per share currently. The bullish momentum continued after eBay reported impressive Q4 quarter earnings results, which exceeded analysts’ expectations. Is eBay a good investment opportunity for investors at the current price? Let’s find out.

Business Snapshot

eBay is considered to be the world’s leading commerce platform and payment solution provider. In 2011, eBay had more than 100 million active users who used the company’s platforms. The company is operating in three main business segments: Marketplaces, Payments, and GSI. The majority of eBay’s revenue, $5.43 billion, was from the Marketplaces segment, accounting for around 54.3% of eBay’s total revenue in 2011. The payments segment was the second biggest revenue contributor, bringing in more than $4.12 billion in revenue. 

A Cash Cow and Fast Growing Business

In the past 10 years, both eBay's revenue and net income have been growing consistently. The revenue has increased from $1.2 billion in 2002 to more than $11.65 billion in 2011. In the same period, net income has grown from $250 million to nearly $3.23 billion. Its EPS followed the same trend, growing from $0.21 per share in 2002 to $2.46 per share in 2011. Furthermore, eBay is a cash cow business. Since 2002, it has kept generating increasing operating cash flow and free cash flow.

<table> <tbody> <tr> <td> <p><em>USD million</em></p> </td> <td> <p><strong>2002</strong></p> </td> <td> <p><strong>2003</strong></p> </td> <td> <p><strong>2004</strong></p> </td> <td> <p><strong>2005</strong></p> </td> <td> <p><strong>2006</strong></p> </td> <td> <p><strong>2007</strong></p> </td> <td> <p><strong>2008</strong></p> </td> <td> <p><strong>2009</strong></p> </td> <td> <p><strong>2010</strong></p> </td> <td> <p><strong>2011</strong></p> </td> </tr> <tr> <td> <p><strong>Operating CF</strong></p> </td> <td> <p>480</p> </td> <td> <p>874</p> </td> <td> <p>1,285</p> </td> <td> <p>2,010</p> </td> <td> <p>2,248</p> </td> <td> <p>2,641</p> </td> <td> <p>2,882</p> </td> <td> <p>2,908</p> </td> <td> <p>2,746</p> </td> <td> <p>3,274</p> </td> </tr> <tr> <td> <p><strong>Free CF</strong></p> </td> <td> <p>341</p> </td> <td> <p>509</p> </td> <td> <p>992</p> </td> <td> <p>1,672</p> </td> <td> <p>1,732</p> </td> <td> <p>2,187</p> </td> <td> <p>2,316</p> </td> <td> <p>2,341</p> </td> <td> <p>2,022</p> </td> <td> <p>2,310</p> </td> </tr> </tbody> </table>

As we can see, both eBay’s operating cash flow and free cash flow have advanced around 6.8 times during the last 10 years, marking an annualized compounded growth of more than 21%.

Strong Fourth Quarter and Full Year 2012

Recently, eBay reported strong fourth quarter 2012 earnings results. The revenue has experienced a year-over-year growth of 18% to $4 billion for the quarter. The net income came in at $751 million, or $0.57 EPS. For the full year, eBay also demonstrated an impressive growth in both topline and bottom line. Its full year revenue increased 21% to $14.1 billion, and the net income came in at $2.6 billion, or $1.99 EPS. In 2012, the company had more than $175 billion of commerce volume in all of its business segments, 18% higher than the total commerce volume last year.

In addition, eBay has experienced significant growth in its mobile business. eBay mobile handled $13 billion in volume, more than double the previous year, and Paypal mobile recorded nearly $14 billion in payment volume, three times higher than the payment volume in 2011. President and CEO John Donahoe expected that both businesses would grow to more than $20 billion each this year. Indeed, the Paypal acquisition has been quite beneficial for eBay as it provides the ultimate payment solutions for merchants and buyers in the Marketplaces segment. The acquisition was described as the combination of the “gorilla” in online payment and the “gorilla” in online auctions. In addition, the increasing offline presence will lead Paypal business to grow rapidly in the near future. 

Is it Cheap?

At the current trading price of $54.43 per share, the company's total market capitalization is $70.48 billion. eBay is valued at 17x forward earnings and 16.23x EV/EBITDA. Its valuation is much cheaper than that of Amazon’s (NASDAQ: AMZN), as Amazon is valued at as much as 155x forward earnings and 55.8x EV/EBITDA. Amazon also had quite low profitability, due to the fact that Amazon has been focusing on the long-term customer satisfaction, rather than short-term bottom line. Amazon CEO Jeff Bezos also confirmed that its Kindle device was sold at cost to users.  Overstock (NASDAQ: OSTK), an online discount retailer with much smaller market capitalization, is valued comparably to eBay, with 17.7x forward P/E and 15.42x EV/EBITDA.

Foolish Bottom Line

eBay is really a stock to hold for the long term, due to its leading position in both online auctions and payment solutions. Even with a high EV/EBITDA valuation, I personally think eBay will deliver a decent return for investors over a long period of time. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends and eBay. The Motley Fool owns shares of 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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