Foolish Forecast: Yea or Nay for eBay?

eBay's (Nasdaq: EBAY  ) second-quarter results are coming up tomorrow. Fellow Fool Rick Munarriz liked the first quarter well enough, but the stock has been pummeled lately anyhow. What's going on?

What Fools say:
Here's how eBay's CAPS rating stacks up against some of its peers and competitors:

Company

Market Cap (billions)

Trailing P/E Ratio

CAPS Rating

eBay

$36.2

84.0

***

Amazon.com (Nasdaq: AMZN  )

$27.7

55.5

**

Mercadolibre (Nasdaq: MELI  )

$2.4

137.5

****

Gmarket (Nasdaq: GMKT  )

$1.0

27.6

*****

Overstock.com (Nasdaq: OSTK  )

$0.5

NM

*

Data taken from Motley Fool CAPS on 07/15/2008.

"No one does what eBay does. At least not as well." Thus spoke CAPS all-star EviLucius, accompanied by a Greek chorus of assenting Fools. "They make strong profits and show strong growth," EviLucius elucidated, and the company looks like a good buyout target right now.

The bears disagree, of course. Online classified listing service Craigslist is nibbling away at eBay's market share while recent changes to the pricing structure of auction listings don't sit well with many an eBay seller. mpapile complains that "I have never seen a company do so much stupid stuff after doing great things and having a near monopoly on auctions."

What management does:
"But what happened to that $900 million Skype writedown last fall? Didn't that hurt?"

Calm down, Fool. Yes, it did hurt, and eBay certainly overpaid for the online phone-and-chat service. But excluding those charges, like I've done below, gives you a clearer picture of ongoing operations.

From that perspective, eBay is chugging along just fine. Sales are still growing at a healthy pace, the margins look stable enough if you forgive the gross take's slack trend, and pro forma earnings have ignited lately. Also, the P/E ratio drops to 26 times trailing earnings on this operations-focused basis.

Margins

12/2006

3/2007

6/2007

9/2007

12/2007

3/2008

Gross

78.9%

78.5%

78%

77.6%

77%

76.6%

Operating

24%

24.9%

25.3%

25.4%

26.1%

25.8%

Net

16.3%

16.8%

17%

16.9%

17.4%

17.2%

FCF/Revenue

29%

27.7%

28.5%

28.5%

28.5%

28.9%

Y-O-Y Growth

12/2006

3/2007

6/2007

9/2007

12/2007

3/2008

Revenue

31.1%

29.2%

29.3%

29.3%

28.5%

27.6%

Earnings

0.6%

10.6%

25%

33.1%

37.5%

30.8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
eBay has taken its lumps for the Skype deal already, and I think we should get over it. This is still a market leader in a sector that seems almost immune to economic downturns, and there is nothing wrong with the underlying financial performance. It's been four years since the company last disappointed Wall Street with an earnings report -- yet eBay's market cap has been slashed in half since January 2005.

Buyout bait, indeed. Well, the proof is in the pudding, and eBay has a chance to show us that those pricing changes made sense. If sellers feel slighted, it'd make sense that buyers would be delighted, and in turn drive more business to the angry peddlers. In the end, everyone should be happy when the end customer wins. And that, my friend, is how I think the story will play out.

Catch up with eBay:

Gmarket is a Motley Fool Rule Breakers selection. eBay and Amazon.com are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.Or just sign up for a free CAPS account to find the identities of your fellow Fools who were quoted above. They might have more to tell you!

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.


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  • Report this Comment On July 15, 2008, at 6:32 PM, UnhappyEbayer wrote:

    Wait til the news comes out about the Paypal counterfeit ring with liquidation.com. How they take the fakes off the market, by sending them to a liquidator to resell them and THEY make the full profit. It's unbelievable!

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