eBay (EBAY) got crushed last week after reporting disappointing earnings, missing EPS targets by a penny and pegging guidance at the low end of its expected range. Following its report, EBAY shares lurched down 8% in short order, and they haven’t bounced back since.
But there might be a good case for buying eBay stock right now after the selloff. A rather modest earnings miss and an otherwise solid quarter, coupled with some bigger long-term potential for its Marketplace model, could make this e-commerce giant a good buy.
The bearish case is that Wall Street simply isn’t impressed. eBay has a decent record of hitting expectations, but its stock is basically flat year-to-date in 2013 and has slightly underperformed the broader market in the past 12 months thanks to a lack of compelling arguments in its favor.
Sure, eBay is big and has seen top-line revenue grow like clockwork every quarter for more than four straight years. But earnings have been up and down — and most importantly, it doesn’t have hardware. Apple (AAPL) has its iTunes store and wide selection of apps to fuel its devices, Amazon (AMZN) has a Kindle and its Appstore for Android devices, Google (GOOG) has its Nexus line of devices and Google Play … but eBay is decidedly at the mercy of whatever smartphone or tablet that its customers use.
This is a big risk, of course, since Amazon in particular has a lot of incentive to keep people in its ecosystem and on its cloud — and it’s hard to argue that eBay (or any retailer, e-commerce or otherwise) faces a bigger threat than AMZN.
But there are reasons to give eBay stock some attention now that its forward P/E has slipped to about 16 — on par with the 15.5 valuation multiple of the Nasdaq-100, and only slightly better than the S&P’s forward 12-month P/E of 14.9, according to data compiled by the Wall Street Journal.
Here’s what eBay has going for it right now:
PayPal: I’ll be quick, since this is an old argument. PayPal currently accounts for more than 40% of eBay’s revenue, with over 130 million active users and payment volume of over $40 billion. Most recently, the latest eBay earnings showed its PayPal division posting 20% year-over-year growth in revenues, adding 4.7 million registered accounts for a 17% bump in users.
Marketplace Model Is Working: Even without hardware, simply hooking people up with its merchants via browsers or an app has been enough for eBay to see big growth. Total e-commerce volume was up 21% year-over-year. And elsewhere, ChannelAdvisor, a leading e-commerce research firm, reported 17.7% growth year-over-year for the equivalent of “same store sales” on eBay for June — up from 16% growth in May. Also, fixed-priced auctions — that is, items not available for bid and thus more likely a proxy of merchants and not consumers having a garage sale — were up 18.9% vs. 15.7% in May, according to ChannelAdvisor. Clearly eBay is still connecting powerfully with its customers.
Cassini Search Has Big Potential: eBay has a new search engine — called Cassini, named after the 17th-century astronomer — powering the results for shoppers. Based on user response and a little poking around, it’s a big improvement over the troublesome search functionality that has persisted on eBay for so long. It has been reported that eBay poached engineers from Microsoft (MSFT) and its Bing unit to oversee the Cassini search engine launch, and simply surfacing more of what people actually are looking for could have material gains for the e-commerce stock going forward.
Insider Ownership: eBay’s high insider ownership should not only provide stability to shares, but incentivize directors and officers to unlock long-term value and not just chase fads. Founder Pierre Omidyar owns $6.35 billion in eBay stock and current CEO John Donahoe is next in line among top holders with “only” $26.7 million in shares. Other officers are high on the list of insider owners, too, and these folks obviously have a big interest in seeing eBay succeed.
Wild Cards: Don’t forget eBay also owns StubHub, which has helped reinvent how folks shop for event tickets, be it a trip to the ballpark or a concert. eBay also owns Shopping.com, an aggregator of online marketplaces to take a small fee for referring people to its competitors instead of just losing the sale altogether. Then there are all the PayPal experiments, including an alliance with Discover (DFS) to provide PayPal services to thousands of small businesses nationally and move into the brick-and-mortar payments biz.
There are big risks here, of course, since it is increasingly a world driven by hardware. But don’t count out eBay stock just because the company doesn’t have an “ecosystem.” Being a top online retailer might be enough to keep the business stable, and the potential of PayPal could help fuel significant growth going forward.
- Ebay earnings recap. (MarketWatch)
- More specifics on the power of PayPal. (Venture Beat)
- Details on the DFS/PayPal partnership. (Engadget)
- FWIW, Cramer likes eBay too. (CNBC)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.