Is eBay a Sweet E-commerce Pick 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 been quite volatile since the beginning of the year, fluctuating in the range of $49.80 per share to nearly $57.80 per share. Recently, its share price dropped significantly, from $57.40 per share to only $52.20 per share, mainly due to the its weak forecast for full year results. Reuters also reported that at least six analysts reduced their target price for eBay to $60-$64 per share. Let’s take a closer look to see whether or not eBay is a good buy now.

Strong revenue growth, but declining EPS

In the second quarter, eBay experienced strong growth in both revenue and adjusted net income. Its revenue increased by 14%, from $3.4 billion in the second quarter last year to more than $3.87 billion this year. The adjusted net income came in at $822 million, or $0.63 per share, 13% higher than the adjusted net income of $730 million, or $0.56 per share last year. However, the reported net income declined 8% to $640 million, or $0.49 per share, mainly due to the gain on divested business in the second quarter last year. Among the three business units, the Payments segment enjoyed the highest growth at 20% in sales, while the growth of the Marketplaces and Enterprise segments were 10% and 11%, respectively. The Enabled Commerce Volume reached $51 billion across all three business units.

For the full year 2013, eBay estimated that it could generate around $16 billion-$16.5 billion in revenue, while the GAAP-diluted EPS is expected to stay in the range of $2.21-$2.26. The company’s President and CEO, John Donahoe, felt bullish about the company’s future, despite the macroeconomics challenges in Europe and Korea. He said:

“Macroeconomic headwinds in Europe and Korea will continue to be a challenge in the second half of the year. But our core businesses are strong and we continue to attract millions of new customers each quarter through mobile innovation. We remain confident in our ability to meet our goals and drive global commerce innovation and leadership.”

What I really like about eBay is the consistently positive and growing trend of free cash flow. In the past ten years, eBay has managed to grow its free cash flow from $509 million in 2003 to more than $2.58 billion in 2012. In the past twelve months, the free cash flow came in at $2.93 billion. Moreover, I personally think that eBay has grown its ecommerce business thanks to the strong support of the fast-growing PayPal payment system. PayPal has grown its active registered account number by 4.7 million to 132 million in the period. eBay is trading at at $52.20 per share, with the total market cap of $67.70 billion. The market values eBay at around 16.36 times its forward earnings.

eBay is cheaper than Amazon and Overstock

At the first glance, investors might think that eBay is expensive at its current trading price. However, it is relatively cheap compared to its peers, including Amazon (NASDAQ: AMZN) and Overstock.com (NASDAQ: OSTK). Amazon is trading at $305.20 per share, with the total market cap of $138.90 billion. The market values Amazon at as much as 96.3 times its forward earnings. Amazon is famous for its reading device and tablet, the Kindle. Founder and CEO, Jeff Bezos, commented that the company broke even on the hardware. The actual Kindle’s success is measured by the volume of books and content that consumers purchased. That explained the low profit that Amazon produced over the years. Jeff Bezos is well-known for his long-term view, having tried to build great products and services for consumers. Amazon has manufactured a great Kindle Fire tablet, expanded its distribution warehouses, and enriched its digital content. Under the leadership of Jeff Bezos, I think Amazon could continue to prosper, delivering good returns for its shareholders in the long run.

Overstock.com also had a much higher valuation than eBay. It is trading at $32.80 per share, with the total market cap of $775 million. The market values Overstock.com at 26.86 times its forward earnings. Recently, the market has turned quite bullish on the stock, with a 20% daily gain after its impressive earnings report. In the past twelve months, its stock price has advanced four-fold to nearly $32.80 per share. In the second quarter of 2013, its revenue experienced a 22% increase to $293.2 million, while diluted EPS increased as much as 650%, from $0.02 per share last year to $0.15 per share.

Among the three companies, Overstock.com seems to be the most profitable business, with the highest return on invested capital at nearly 70%. eBay’s ROIC ranked second, with a much lower ROIC at 11.7%. Amazon delivered a negative ROIC at -1.42% in the past twelve months. However, Amazon’s main concern is not about margin and profitability; if the company could deliver great products and services to customers, long-term profitability will eventually follow.

My Foolish take

With a global leading position in the e-commerce industry, and strong support from its PayPal business, eBay could experience good growth in the long run, delivering decent returns for long-term investors. eBay will also benefit from the rising retail mobile trend. According to analyst, Brian Nowak of Susquehanna Financial Group, eBay has the significant edge to be a “sizeable first-mover in mobile app, as its mobile app traffic is 50 times larger than the median traditional retailer.” With a much lower valuation than its peers, eBay could be a good stock for investors now.

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Anh HOANG 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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