Should Investors Bid on This Company?

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2012 draws to a close, I would like to look at a leader in the online shopping industry: eBay (NASDAQ: EBAY).

 

Strengths:

  • Accelerated Revenue Growth: In 2006, eBay reported revenue of $6.0 billion, and in 2011, the company announced revenue of $11.7 billion, representing year over year annual growth of 14.29%, a trend is that is widely anticipated to continue into the future, with projections placing 2016 revenue at $23.3 billion. This growth has been fueled by an increase in sales on eBay's website and the meteoric rise of PayPal as a distinguished payment option

 

  • Institutional Vote of Confidence: 83% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Massive Margins: eBay currently possesses a net profit margin of 27.65%, representing a strong and profitable company; these margins are a result of eBay's pricing power and premium platform
  • Cash & Equivalents: At the moment, the company possesses $7.3 billion worth of cash and cash equivalents on their balance sheets, a major upside to the company
  • Brand Name: The eBay brand drives the majority of the traffic to the website, and this established brand name provides security to the company as it would take another company years to establish such a distinguished and recognized name

Weaknesses:

  • Pricy Valuation: Currently, eBay possesses a price to earnings ratio of 17.42, a price to book ratio of 3.67, and a price to sales ratio of 5.67, all of which point to a company that is valued with multiples slightly above the average; however, eBay’s growth compensates for some of the premium; however, the company is trading at a discount

 

  • Debt: eBay currently holds about $4.5 billion of debt on their balance sheets, a major downside to the business; much of this debt has been accumulated through expansion operations
  • Lack of Dividend: At no time in the company’s history has eBay paid out a dividend, and the company has expressed no plans of doing so anytime in the near future; this lack of dividend is a major downside to the company, especially in this volatile economic landscape
  • Operating Expenses: When a business expands as much as eBay’s has, the operating expenses related to running the business will increase; however, over the past 10 years operating expenses have grown faster than revenues, an ominous sign

 

Opportunities:

  • Growth in Consumer Spending: In an economic landscape riddled with so much uncertainty and stagnation, consumers have less confidence to spend money. But if consumer confidence was to increase, more people would spend money, increasing eBay’s sales

 

  • Online Shopping: Year over year, holiday online shopping grew 16% from 2011 to 2012; a recent report by Forrester analyst Sucharita Mulpuru estimated United States shoppers will spend $327 billion online in 2016, up 45% from $226 billion this year, and eBay is at the forefront of taking advantage of this trend
  • Paypal: Paypal is hailed by many to be the payment method of tomorrow, and is one of the fastest growing segments of eBay. PayPal will continue to accelerate in growth as more and more shoppers experience the benefits of the service

 

  • Acquisitions: In 2002, eBay acquired Paypal for $1.5 billion, and further acquisitions are probable and are likely to fuel future growth

Threats:

  • Competition: The online shopping industry is a very crowded space, and competition in this industry to offer the best product for the least amount of money can lead to margin compression
  • Fiscal Cliff: If the United States was to fall off of the fiscal cliff, taxes would be raised on all Americans, leaving them with less money to spend, hurting eBay’s revenue
  • Declining Transaction Commission Rate: eBay’s transaction commission rate is widely anticipated to drop sharply in the coming years, forcing eBay to sell more items to produce the same amount of revenue

 

Competition:

Major publicly traded competitors of eBay include Amazon (NASDAQ: AMZN), Overstock.com (NASDAQ: OSTK), and Mercadolibre (NASDAQ: MELI). Amazon is the largest online retailer in the industry, being valued at $117.14 billion; however, it carries a ridiculous valuation. Overstock is a much smaller competitor, being valued at only $327.09 million, and also carries an unreasonably high valuation. Mercadolibre has been called the “eBay of Latin America” and is valued at $3.48 billion.   

The Foolish Bottom Line:

eBay is an incredible play on the rapidly expanding online retail industry. The company possesses accelerated revenue growth, in addition to both large cash and debt loads. However, eBay pays out no dividend, a major downfall for long-term investors. All in all, eBay may face some short term weakness due to the fiscal cliff, but is a fantastic play on the long term online shopping trend. 


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and MercadoLibre. Motley Fool newsletter services recommend Amazon.com, eBay, and MercadoLibre. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure