Why eBay Is Still A Buy After Earnings

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

Although eBay (NASDAQ: EBAY) came out and reported holiday earnings in line with expectations and put 2013 guidance on the low-end of estimates, the tech company is up 6% year to date. The weak outlook puts first quarter earnings per share projections at $0.60-$0.62, compared to analysts' estimates of $0.63 for 1Q 2013, and $2.70-$2.75 for FY 2013, as opposed to analysts’ estimates of $2.74. Even still, I think eBay is cheap and presents investors with significant growth opportunities. Fourth quarter results did show some resilience, with fourth quarter 2012 revenues up 18% year-over-year. The payments segment revenue was up 24%, and the marketplace revenue was up 16%.

On a price to earnings basis, eBay trades at 17 times (forward earnings), but this multiple is being unfairly held down due to its classification as an e-commerce company. By breaking the business into two parts one can better estimate how eBay should trade on a multiples basis. The two businesses for eBay include its marketplace and payment segments. The marketplace is its ebay.com platform, which offers a selling and buying platform using an auction or fixed price method. Other important marketplace and e-commerce sites include StubHub, which offers tickets for sporting events and concerts, and Rent.com, which offers rental accommodations. The payments segment includes PayPal and Bill Me Later, together accounting for around 38% of revenue. PayPal is the online payment facilitator and Bill Me Later offers customers credit.

Both the marketplace and payments segments still present solid growth opportunities, and both have grown revenues sequentially over the last eight quarters. The reliance on the PayPal and payments segment will likely only intensify going forward as eBay’s marketplace continues to lag the e-commerce leader Amazon.com (NASDAQ: AMZN); but the marketplace segment should continue to fund the payments segment's growth. The marketplace segment cash flow should continue to fund growth in the payments sector, where the marketplace makes up over 50% of revenues and the margins are generally much higher than payments margins. The most recent big move is eBay’s agreement with Discover. PayPal will now be accepted in retail stores on Discover (the fourth largest credit card company in the U.S.) machines across the U.S. PayPal continues to be a key driver for the eBay. Its transaction volume was up 24% year over year for the fourth quarter.

The push into mobile is well documented for the payments segment. Mobile transaction volumes continued to see explosive growth. For the full-year, eBay mobile finished with $13 billion in volume, up more than 100% from the previous year, and PayPal finished the year with $14 billion, up more than 250% in the same time frame. ABI Research estimates that the mobile commerce market doubled in 2011, and the research company expects mobile e-commerce to represent over 24% of total e-commerce sales by 2017. eBay is also working on expanding its revenue generation capabilities to outside the U.S., where around 48% of total revenue was generated in the U.S.

Based on the fact that eBay's core marketplace business remains robust, its PayPal business is growing like gangbusters, mobile remains a future growth catalyst, and shares look extremely attractive for the money. Mobile payments is one of my top investing themes for investors to consider in 2013. According to IDC, worldwide purchase volume on mobile devices will exceed $1 trillion by 2017, putting PayPal in a great position to take advantage of this boom. This sets the stage for PayPal to become a larger business for eBay than where its core marketplaces business is today. For only 18 times earnings, you get the opportunity to buy an excellent company that's already capitalizing on the mobile payments revolution. 

Breaking down the segments

Some of the best competitors for the marketplace segment include Amazon, Overstock and Groupon (NASDAQ: GRPN). For the payments segment it is Visa (NYSE: V) and MasterCard (NYSE: MA). Although they are still primarily debit card providers, Visa and MasterCard have both announced plans to enter the mobile payments market. Visa's latest initiative includes approving Research In Motion's mobile payment system. Meanwhile, MasterCard has teamed up with ING to break into the international payments market, starting with introducing mobile payments in the Netherlands. Groupon is a relative newcomer that is shaking up the e-commerce market with group buying and coupons. However, the stock is down 80% since its December 2011 IPO. Amazon continues to be the undisputed leader in the e-commerce market, capturing even more market share over the 2012 holiday season

The multiples for each of the major competitors are outlined below:

<table> <tbody> <tr> <td> <p><strong>Comps - Marketplace</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/E (forward)</strong></p> </td> </tr> <tr> <td> <p><em>Amazon</em></p> </td> <td> <p>2.2</p> </td> <td> <p>155.45</p> </td> </tr> <tr> <td> <p><em>OverStock</em></p> </td> <td> <p>0.32</p> </td> <td> <p>17.71</p> </td> </tr> <tr> <td> <p><em>Groupon</em></p> </td> <td> <p>1.45</p> </td> <td> <p>21.21</p> </td> </tr> <tr> <td> <p><strong><em>Average</em></strong></p> </td> <td> <p><strong><em>1.32</em></strong></p> </td> <td> <p><strong><em>64.79</em></strong></p> </td> </tr> <tr> <td> </td> <td> </td> <td> </td> </tr> <tr> <td> <p><strong>Comps - Payments</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/E (forward)</strong></p> </td> </tr> <tr> <td> <p><em>Visa</em></p> </td> <td> <p>11.85</p> </td> <td> <p>18.99</p> </td> </tr> <tr> <td> <p><em>MasterCard</em></p> </td> <td> <p>8.42</p> </td> <td> <p>20.4</p> </td> </tr> <tr> <td> <p><strong><em>Average</em></strong></p> </td> <td> <p><strong><em>10.14</em></strong></p> </td> <td> <p><strong><em>19.70</em></strong></p> </td> </tr> </tbody> </table>

 Blending these multiples based on eBay’s sales breakdown gives us the following:

<table> <tbody> <tr> <td> </td> <td> <p><strong>eBay</strong></p> </td> <td> <p><strong>Blended Peers</strong></p> </td> </tr> <tr> <td> <p>Price to Earnings</p> </td> <td> <p>17.09</p> </td> <td> <p>47.65</p> </td> </tr> <tr> <td> <p>Price to Sales</p> </td> <td> <p>4.3</p> </td> <td> <p>4.7</p> </td> </tr> </tbody> </table>

Applying the sales breakdown, we get a theoretical comparable P/S multiple of 4.7x. The 2013 sales estimates by Wall Street come out to $18.64 billion, which at the blended P/S multiple of 4.7 puts the potential stock upside at 25%, or to $87.08 per share. eBay's balance sheet also appears to be rather solid. Cash comes out to $9.4 billion, with debt of only $4.5 billion. 

 On a price to cash flow basis, eBay is well below its various competitors:

<table> <tbody> <tr> <td> </td> <td> <p><strong>eBay</strong></p> </td> <td> <p><strong>MasterCard</strong></p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong>Visa</strong></p> </td> <td> <p><strong>OverStock</strong></p> </td> <td> <p><strong>Amazon</strong></p> </td> </tr> <tr> <td> <p><em>Price to Cash Flow</em></p> </td> <td> <p>13.7</p> </td> <td> <p>27.5</p> </td> <td> <p> </p> </td> <td> <p>43.5</p> </td> <td> <p>18.8</p> </td> <td> <p>65</p> </td> </tr> </tbody> </table>

eBay appears to be rather cheap when looking at the multiples, where the tech company trades below its major peers on a price to earnings, price to sales, and price to cash flow bases. Going forward, with Wall Street estimates for long-term earnings growth at 13.5%, the PEG (price to earnings to growth) ratio comes in at 1.27. A ratio below 2 is considered a solid growth at a reasonable price opportunity. It also appears that billionaire Steve Cohen finds the valuation compelling, upping his stake 625% during the third quarter (check out Steve Cohen's top picks).

mhargra has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, and Visa. The Motley Fool owns shares of Amazon.com, eBay, and MasterCard. 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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