eBay Earnings Preview: Can the Tremendous Growth Story Continue?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the most popular e-commerce destinations, eBay (NASDAQ: EBAY) has done quite well for its shareholders over the past several years. Since its 2009 low of $9.91, eBay’s share price has increased by 433%. With the company set to report earnings next Wednesday, investors will be looking for signs to determine whether eBay’s extraordinary growth is in the past, or if the company has more tricks up its sleeve.
For those who don’t know, eBay is the world’s largest online trading community. Still growing its customer base at a nice rate, the company had 100.4 million active users at the end of last year, up from 94.5 million a year earlier. They have been very active in acquisitions recently, most notably acquiring Bill Me Later (online payments), Gmarket (Asian e-commerce), PayPal (online payments), and StubHub (online ticket sales). Also benefiting eBay is its recent sale of Skype to Microsoft (NASDAQ: MSFT), who paid $8.5 billion for the company.
EBay’s strategy is to become the largest and most efficient marketplace in the world, by creating a global marketplace that runs faster, easier, and safer than any other. All of the company’s recent acquisitions have helped the company reach their goals, with companies such as Bill Me Later and Paypal to improve efficiency and Gmarket and other internationals to help fulfill eBay’s vision of a truly global marketplace. I fully anticipate this trend of strategic acquisitions to continue over the coming years, with an emphasis on international growth.
EBay is also looking more shareholder-friendly in recent years, with a $2 billion share buyback program announced in late 2010, which should help increase shareholder value considerably over the coming years. Since the program was implemented, the number of outstanding shares has dropped from 1.327 billion to 1.294 billion, a decrease of 2.5% in less than two years.
In terms of valuation, eBay trades at a pretty high P/E ratio, which is typical of companies with eBay’s level of growth. EBay currently trades at 22.5 times the consensus estimate for 2012 of $2.35 per share. However, taking into account that the company has $5.93 billion in cash and only $1.53 billion in long-term debt (a net cash total of $4.4 billion), backing that out of the share price implies a P/E on eBay’s business of 21.2 times earnings, not bad considering the anticipated growth rate. Consensus calls for earnings to increase to $2.74 next year and $3.18 in 2013, an average annual growth rate of 16.3%, which certainly justifies the company’s valuation.
When eBay reports on Wednesday, there are two things to pay attention to. First, and most obviously, pay attention to the actual earnings number. Analysts are projecting 69 cents per share, and the company has a long history of meeting or beating expectations, which it has done for the past 15 straight quarters (10 meets, five beats). This is mostly why eBay has had such a dramatic climb over recent years; they certainly have delivered good numbers. An earnings miss could be devastating to the share price of a company that is not used to disappointment, so that is certainly something to keep an eye on.
Second, listen for any details on eBay’s international growth plans, particularly in Asia. In my opinion, eBay is about as big as it's going to get within the U.S., so when it comes to international expansion, the more aggressive the better. Also pay attention to how they plan on maximizing the benefit from their recent acquisitions, particularly PayPal, which is a large generator of revenue outside of eBay’s site.
To sum it up, eBay has been a tremendous growth story, and has potential for much more growth to come. However, this is a company that is definitely not used to bad news, so I would wait to see if it gets any of it this time, as any bad news could create a tremendous buying opportunity.
KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends eBay. The Motley Fool owns shares of Microsoft. 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!