After Its Surge Today, Is eBay Still a Buy?

With shares of online auction powerhouse Ebay (Nasdaq: EBAY  ) jumping more than 5% today on the heels of an impressive earnings report, the stock continues to perform remarkably well. Shares have spiked nearly 60% in 2012 alone, and are up more than 90% since three years ago.

In that same time, the S&P 500 (INDEX: ^GSPC  ) is up just 33%. As a long-term investor, you may be wondering whether this could still be an investment with some room to run, or whether the market's been a little overenthusiastic. Let's see what yesterday's results can tell us about the answer to this question:

An impressive quarter
Revenue for the third quarter increased 15% to $3.4 billion, which was about in line with estimates. The company impressed was its EPS, which, at $0.55, beat expectations by $0.01. PayPal, eBay's online payment-processing system, continues to be a strong engine of growth for the company, and is behind much of its recent success. PayPal's strength is in its growing pervasiveness: there are now more than 117 million active accounts. It's a great example of the network effect because, as more merchants begin to accept PayPal, more customers get accounts to buy things they want, thereby encouraging more merchants to sign on.

One question going forward is whether the PayPal platform can continue to drive the company, or whether it's reaching maturity. Revenues (+23%) are increasing at a much higher clip than the user base is (+14%), and investors should consider whether charging higher fees, or hoping for a greater number of transactions, is a sustainable way to grow.

But what of the competition?
There's no doubt that eBay has a robust business model. But it doesn't operate in a vacuum. Overstock.com (Nasdaq: OSTK  ) , while competing directly with eBay, only does so in a technical sense. Revenues began declining in 2011, and the company swung to a loss. With about $1 billion in annual sales, Overstock doesn't occupy a significant amount of the e-commerce market, and looks over-hyped as a true competitor.

Let's talk about the $110 billion elephant in the room, which happens to be -- cue the drumroll -- Amazon.com (Nasdaq: AMZN  ) . More akin to a monster than an elephant, Amazon appears determined to destroy all those who dare to obstruct its path. If Amazon were an amalgamation of historical figures, it would be an Abe-Lincoln sized Teddy Roosevelt with a Napoleonic complex. In a word: terrifying.

Having single-handedly slaughtered Borders and Circuit City, e-tailers may be the next victims. Its 2011 sales totaled nearly $50 billion -- a 40% increase from the year before. And with its Kindle selling at or near cost, Amazon is trying desperately to enter the tablet market and seize mobile customers to expand its presence even more. 

While eBay's margins are expanding, Amazon's are tightening, as CEO Jeff Bezos tries to undercut rivals on cost to gain loyal customers. The trends suggest fundamentally different philosophies for seizing the future of online retail; it remains to be seen which one will prove more lucrative. 

The bottom line
By no means is eBay doomed to a future of ho-hum growth. MercadoLibre (Nasdaq: MELI  ) could help to fuel the business in future years, as eBay owns almost 20% of the Latin-American auction site. With a presence in places like Brazil, Argentina, Chile, Mexico, and a handful of other countries, it allows eBay to wet its beak in the promising commercial potential native to emerging markets. But with less than $300 million in sales last year, MercadoLibre can't be eBay's only hope for expansion.

With the PayPal platform under its belt, eBay magnifies the power of its network effect, and allows the company to be more than just the eBay domain, which is still a strength in itself. Yesterday's earnings report showed the largest annual growth in active users since 2007, aided by 800,000 new mobile customers.

In the Motley Fool CAPS community, eBay boasts a four-star rating, and its business model and staying power remain compelling reasons for investors to invest. I believe eBay is an above-average company and, as such, deserves to trade at a premium to the market. But it doesn't. It trades right in line with the average stock in the S&P 500, at less than 17 times earnings -- which makes it one auction worth considering.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward looking and capable companies will survive, and they'll handsomely reward those investors that understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our premium research report. Uncovering these top picks is free today, just Click Here to read more.

John Divine has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and MercadoLibre. Motley Fool newsletter services recommend Amazon.com, eBay, and MercadoLibre. 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.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2065345, ~/Articles/ArticleHandler.aspx, 12/19/2014 8:43:24 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement