eBay: Better Than The Best

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

With Thanksgiving coming, investors are keeping a close view on retail and ecommerce stocks. With shopping generally consisting of two steps- buying and paying, eBay (NASDAQ: EBAY) offers a complete solution for an investor’s Thanksgiving needs with its two branches- Marketplace and Payments. eBay is bound to see action even if one purchases at Overstock (NASDAQ: OSTK) as the mode of Payment used could be PayPal. Furthermore, with eBay working on its mobile apps for Thanksgiving, I believe that eBay can gain a lot of traction this holiday season and hence rate it as a buy. 

State Of Competition Between the Giants

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With Amazon (NASDAQ: AMZN) and Overstock as its competitors in the marketplace and Visa and MasterCard as its competitors in the Payment segment, eBay understandably faces a lot of competition.  But what puzzles me most is the fact that eBay is being treated as an unwanted child. Even with its excellent performance the Street has always remained skeptical. While its main marketplace competitor, Amazon, trades at sky-high PE multiple despite not so good earnings, eBay trades at a multiple not even 1/100th of Amazon in spite of good FCF, excellent YoY revenue growth, and good operating margins. The Street seems impervious to the fact that Amazon reported EPS of negative $0.60 and revenue growth of 27% YoY missed the estimates. On the other hand it accentuated the positives as it focused on the fact that Amazon made lesser losses than predicted (Q3 operating loss of $28 million was less than estimated losses of -$42.1 million) with the shares of Amazon rising ~7% following the earnings report.

Overstock shares have rocketed as the company has announced its first profitable quarter on 25 October but it still feels heavily priced and much more risky when compared to eBay which has better operating margins and a more recognizable brand name.

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Something similar is the case in the payment sector too. eBay has a low PE ratio of 16.3x when compared to both Visa and MasterCard having a PE of 45.2x and 27.3x respectively. While MasterCard operates on higher operating margins than eBay, it trades at twice of eBay’s PE multiple. Of notice is also the fact that eBay has generated much higher YTD returns of 57.37% when compared to 40.78% for Visa and 24.63% for MasterCard. 

A Host of Catalysts:

1)Partnership with ParkMobile: After eBay announced its partnership with Discover in august, which will bring PayPal to more than 7 million offline merchants across the US to eBay, it has struck a deal with ParkMobile, a leading provider of mobile payment solutions to municipalities and parking providers in 350 cities with millions of registered users. According to the agreement PayPal will be launched as the official payment option for ParkMobile in 20 cities across the U.S in the first phase to make mobile payments easier. I believe that Paypal will gain market share and momentum as the deal will be rolled out across whole of ParkMobile’s base.

2)The Mobile Opportunity: As the company is monetizing the same on the mobile as on the web according to a statement by eBay’s CEO John Donahoe, I believe that eBay has overcome one of the most famous threats for the internet based companies. Apart from that John also announced that eBay is currently working with Macy’s to make an app which will get the thanksgiving shopping on the fingertips of mobile shoppers. With mobile becoming a choice mode for going online, I believe that eBay can create lots of such opportunities which can generate awareness and help the business in the long run.

3)Ecommerce in Europe:  With E-commerce growth rates across Europe continue to be in their high teens with U.K. at 15%, Germany at 14% and Italy and Spain at 20%, eBay is well positioned to take advantage as European customers look to stretch their euro.

A Look at the Financials:

 

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Source: Company Earnings reports

Free Cash Flow

The company generated $792 million of free cash flow in 3Q12 which sent the net cash holding with the company to a total of $10.8 billion. The FCF increased 92% over the adjacent quarter and 51% over the same quarter last year. Also to note is that FCF as a percentage of revenue was recorded at 23%, highest in the last 7 quarters. eBay also raised its guidance for year 2012 as it increased its Non-GAAP EPS guidance from $2.28-$2.33 to $2.32 - $2.35.

The Bottom Line

eBay is a relatively defensive play on eCommerce and payments business with a fairly attractive valuation multiple. I believe that eBay would continue to gain traction in its core Marketplace business, while the PayPal segment will continue to gain share both online and offline with the multiple agreements and deals eBay is seeing. eBay can generate much higher returns than its global peers with its multiple catalysts and likelihood for increased share repurchases with its strong financials.


TheMoodyAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and MasterCard. Motley Fool newsletter services recommend Amazon.com, eBay, Overstock.com, and Visa. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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