How Much Higher Can eBay Go?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It looks like eBay’s (NASDAQ: EBAY) share price is finally catching up to its valuation. This unappreciated stock is getting some respect from the market, as you can see below. eBay even passed the $50 level last month--but is that price justified, or not?
The share price is justified by eBay’s revenue, which has been growing at a remarkable pace in recent months. In the past two years, eBay’s revenue has increased by around $4 billion. eBay’s revenue growth is comparable to that of Amazon (NASDAQ: AMZN), which increased its revenues by almost $30 billion the past two years.
eBay has achieved a growth rate similar to Amazon’s without the accompanying high price. Even though Amazon’s price valuation is justified, eBay’s may not be, which is driving its growth. There are also numbers that show eBay is beating Amazon. For instance, eBay’s earnings per share (EPS) of $2.93 was higher than Amazon’s.
Amazon’s diluted EPS was only 7¢ a share on Sept. 30. Amazon’s EPS has been going down sharply over the year, despite a major increase in revenue. That indicates Amazon’s total value may have increased, but its payout to investors is stalling. So not only is eBay cheaper, it generates more earnings.
The message is clear here: eBay is adding a lot of value. The question we have to ask is if this growth can continue. Or is there a point at which online retailers stop generating value for shareholders? Amazon may have hit the point some time ago, despite its high valuation, and this might explain the reason why Amazon has a very low profit margin and eBay has a high profit margin.
As of Sept. 30, eBay had a quarterly profit margin of 17.54%, while Amazon had a quarterly profit margin of -1.98%. Amazon was losing money on some of its sales, and that might indicate Amazon’s volume of sales is too high; it is spending so much money on processing and shipping orders that it cannot make a profit. Yet even smaller online retailers are plagued by low profit margins. Groupon's profit margin was -.29% and Overstock.com reported a quarterly profit margin of 1.05% on Sept. 30.
eBay is the online general retailer with the best profit margins. The only online retailer I could find that had a higher monthly profit margin was Stamps.com, which is obviously a specialist retailer selling one thing. Unlike Amazon, eBay has figured out how to squeeze a lot of profit out of general online merchandising.
eBay has obviously figured out how to add value in the online retail sector, but how long can it continue? The best answer is for the foreseeable future because eBay has been able to maintain its profit margin and revenue growth in a sluggish economy. Unlike Amazon, eBay has also figured out how to keep both its revenues and profit margin up. Amazon has sacrificed its profit margins in the name of high volume.
PayPal Keeps on Growing and Growing
eBay also has a secret weapon that Amazon does not: PayPal. The online payment service keeps growing and growing. It just changed the rules so that people in Saudi Arabia, the United Arab Emirates, Bahrain, Kuwait, Qatar, and Jordan can link PayPal to locally issued credit and debit cards. That makes it easier for people in those countries to use PayPal to make online purchases. That’s a big deal because it is estimated that $9 billion was spent on e-commerce in those countries last year.
In addition to international expansion, PayPal is moving to become a full-fledged financial services company through its deal with Discover Financial Services (NYSE: DFS). The idea is to enable customers to pay with PayPal through the Discover Card at brick and mortar retail stores. PayPal will profit from this by collecting more transaction fees.
The problem for investors here is an obvious one. How much of eBay’s success is based on PayPal? eBay’s own financials don’t break down the two, so eBay may not be a successful e-commerce company after all. Instead, it might be a very successful financial services company that dabbles in e-commerce. If that’s the case, then it might be PayPal and not eBay that provides the high valuation in this company. It still makes eBay a good buy because it is still undervalued and will probably remain so for a long time to come.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend 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!
