A Must Buy Online Retailer

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

If you own a stock and get a YTD return of 75% on it, you can surely call it a “super” stock. In case you didn’t get it, we are talking about eBay (NASDAQ: EBAY). When you analyze eBay, two questions come in mind. One, what was the major catalyst for the company in 2012? Two, what does 2013 has in store for the online giant?

(Source: www.finance.yahoo.com)

The chart above depicts eBay's constant growth during the last year. On January 11, 2013, the stock was trading at $53.70.

PayPal

eBay’s PayPal was the biggest catalyst in generating incremental growth for the company in 2012. A year over year revenue increase of 23% clearly shows that PayPal is on its way up. Having said this, more than 40% of eBay’s revenue was generated by PayPal during 2012. PayPal’s not only growing in the U.S, but also globally. In 2012, more than 50% of PayPal revenues came from outside the U.S. Moreover, the company is confident that it would hit $10 billion mobile payments through PayPal in 2012. More and more customers are choosing PayPal mobile payment method, thanks to its convenience and safety.

In order to cash in on PayPal’s huge potential, eBay has made significant inroads in the market. Recently, PayPal did a deal with MoneyGram International, which would enable the company’s customers to deposit and withdraw funds from PayPal through MoneyGram’s global presence. PayPal also accepted a partnership with Discover that would allow Discover merchants to accept payments from PayPal’s 113 million users. According to the company, this deal would expand eBay’s reach to 7 million merchants next year. eBay expects to have 20 major retailers working for its “point of sale” solution during the next year. Furthermore, with the PayPal offline expected to do well in 2013, eBay has all its eyes on its premier product.

Bill Me Later

PayPal’s customers can now checkout and pay their bills later through this product. “Bill me Later” allows customers to shop at more than 1000 retailers without the need of a credit card. After PayPal, “Bill me Later” could be the next big thing for eBay in the future. A payment volume of almost $775 million during 3Q 2012 is a testimony to this.

GSI Commerce

One small worrying sign for eBay is GSI Commerce. In 2011, eBay bought GSI Commerce for $2.4 billion. GSIC is one of the leading e-commerce outsourcing firms in the U.S. Retailers, who want to sell products online, but don’t have a proper system of their own on the internet, are GSIC’s clients. GSI’s revenues come from the sales made by their clients (GSIC gets a proportion of their clients’ revenue). At the time of acquisition, eBay was optimistic about GSIC’s potential but it hasn’t paid off as much as it was expected. At the moment, GSIC’s operating margin of 6% doesn’t make it an attractive product like PayPal.

Valuation

According to the sell side, eBay has a mean recommendation of 2.1. Currently, eBay is trading at a P/E (ttm) of 18.13x and a forward P/E (1yr) of 19.38x. Its P/S is 5.16x and has an EPS of $2.93. Using consensus estimates, we can find out its intrinsic value. If we look at high earnings estimates, we see that eBay’s value comes to be $56.50. This shows it’s still an undervalued stock and has an upside potential of almost 6.5%.


eBay’s revenues are expected to grow at a rate of 15.90% in 2013. Using sales multiples, eBay’s value comes out to be $61.50, which shows that it’s undervalued by 16%. Moreover, the high target price form the sell side is $65, showing an upside of 21%.

P/S (ttm)

Revenue Estimate (2013)

Growth rate

Price

5.16x

14.06 billion

15.90%

$61.50

Competitors

eBay's main competitor in the e-commerce industry is Amazon (NASDAQ: AMZN). Despite the fact that the company didn't have a great year (2012), the stock did really well. On January 17, Amazon was trading at $268.93, showing a YTD  capital appreciation of 48%. It has an EPS of $0.88 and is trading at a forward P/E (1yr) of 154.56, clearly showing that it's highly priced at the moment. According to Amazon's investors, the company didn't make a large profit in 2012, due to the fact that it made some heavy investments in Brazil, Japan, Germany, and United Kingdom. Furthermore, low margins on its Kindle tablets have also been the reason behind its low profitability. 

Investors are hopeful that the investments made in 2012 will eventually start to pay off in 2013. But the matter of fact is that Amazon needs more time before it starts to make some significant profits. In short, Amazon is good buy in the long run but not so good in the short run. You can read my detailed take on Amazon here.

Conclusion

At the moment, eBay’s e-commerce revenue is still greater than PayPal. But by mid-2014, PayPal will constitute more than 50% of eBay’s revenues. As PayPal becomes eBay’s premier product, its rival Amazon is starting to capture a significant market share in the e-shopping industry. With the Mobile payments all set to increase to $670 billion worldwide in 2015, PayPal is all set to do wonders in the coming years. It has all the potential to become one of the leading online products in the world. As a result, eBay is expected to see an upside of at least 15-20% in 2013. In short, it's a must buy.



Vamosrafa7 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of 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!

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