eBay Disappointed in 2013, But Watch Out for a Breakout in 2014

eBay (NASDAQ: EBAY  ) has had a disappointing year for a tech stock. Its shares have mostly sat on the sidelines while the broad Nasdaq Composite shot up 33% in the last 12 months. Many investors are aware of how difficult it is to find value stocks among tech giants, since most trade at frothy valuations.

The situation is eerily reminiscent of the pre-Dotcom bubble burst era of the late 1990's, when finding decent bargains among tech stocks was about as difficult as finding a needle in a haystack. Most investors have come to believe that in the tech sector, you have to make concessions: you can either go for a growth stock with a great top-line and close to zero on the bottom-line, or a value stock with a great bottom-line and minimal growth. For the former case, Amazon (NASDAQ: AMZN  ) stands out as a prime investment candidate.

However, eBay is one of those rare tech stocks that easily combines the double-digit top-line growth of a hot technology stock with the bottom-line comfort of a well-run bank. eBay recorded a healthy 16% jump in its earnings and 14% growth in revenue in the last quarter. eBay has a long history of returning handsome profits, something that its online counterpart, Amazon, can hardly lay claim to.

eBay has forged numerous partnerships with large retailers such as Macy's, Target (NYSE: TGT  ) , Wal-Mart (NYSE: WMT  ) , and a host of other smaller chains. Below is a peek into how their respective stocks have been performing over the last five years.

eBay boasts an impressive gross margin and healthy revenue growth. Its 57% gross margin is more than double Amazon's 26.5% margin.

eBay might be a bit boring, and it does not elicit the same nerve-tingling excitement that Amazon does, but the company most certainly delivers. Wall Street has an average price target of $62 for eBay, suggesting 20% potential upside from its current price. In contrast, its tech counterparts' shares are not expected to do quite as well. Facebook has a 10% potential upside from its current share price, Amazon has just 5% upside, and Twitter is expected to drop 32% from its current share price.

Catalysts for more eBay growth
Most investors still associate eBay with its huge online auction site, the largest of its kind in the world. The auction site has largely benefited from the network effect. The ''network effect'' is a common business phrase used to denote the process by which popular services become even more valuable as more and more people use them. This gives the providers of these services major competitive advantages.

eBay might not be the cheapest online auction site in the market today, but it continues to dominate the online auction space. eBay recorded a fantastic year in 2012, with the increased adoption of e-commerce and Paypal payments helping the company beat its own revenue forecast for the year. eBay enabled a staggering $175 billion in global commerce volumes, leading the firm to command a 19% share of the global e-commerce market and a 2% share of the retail market.

  1. eBay's Paypal

eBay owns and operates the world's most popular online payment service, Paypal. Paypal has been a front-runner for eBay, with Paypal revenue growing 25% in 2012. Paypal accounted for 40% of eBay's $14 billion in revenue for 2012.

eBay is looking to integrate Paypal into the firm's adjacent Marketplaces platforms that include Rent.com and Shopping.com. The increasing use of Paypal on third-party merchant platforms will also deliver more revenue for the company. Mobile Paypal payments have been recording huge growth, and they grew an amazing 250% in 2012 alone.

Tie-ups with companies such as Discover Financial Services and NCR Corp, as well as the increasing use of mobile devices, will lend strong support for Paypal. The number of active Paypal accounts was 123 million at the beginning of 2013, and this number is expected to grow 17% per annum through 2015, according to Susquehanna Financial Group.

In a market replete with payment options, reward programs can easily win new fans. Paypal has a key structural advantage in this arena: 40% of its transactions are done via the Automated Clearing House. This is a bank transfer service that is overseen by the Fed. This is a free ride of sorts that gives Paypal an outsized cash flow.

  1. Transforming into an Amazon

Although eBay is still primarily identified with its old tag as an online auction site, revenue earned from online auctions currently makes up less than 30% of eBay's total revenue. The online giant has been slowly transforming itself into an Amazon, under the watchful eye of CEO John Donahoe. Roughly 70% of eBay transactions now come from online shoppers clicking on ''Buy It Now'' buttons.

eBay has been busy adding Amazon-like capabilities to its site that include the utopian retailing concept, same-day deliveries, and free shipping. However, eBay has one key point that might make it more attractive than Amazon in the eyes of sellers: eBay does not stock or sell its own merchandise, and, therefore, it avoids competing directly with third-party sellers. eBay operates e-commerce websites for several large retail players including Macy's, Target, and Wal-Mart.

eBay has been particularly keen on bolstering its same-day deliveries. It bought UK start-up Shutl, a major competitor in  the space, in October 2013. Shutl has recorded ringing success in same-day deliveries, and eBay will not doubt benefit from its expertise. eBay's same-day delivery service will help it compete favorably with Amazon's Amazon Prime service.

Bottom line
It's a bit hard to understand why speculators and momentum players continue to search for companies with close to 100% top-line growth but zero on the bottom line while dreaming about future monetization. Meanwhile, companies that are screaming bargains, such as eBay, stare them in the face. eBay not only trades at attractive valuations compared to its peers such as Amazon, it also has a sound track record of revenue and earnings growth--that's a rare combination for a tech stock.

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  • Report this Comment On December 19, 2013, at 11:43 PM, PhilipCohen wrote:

    "But Watch Out for a Breakout in 2014"—Dream on ...

    The only measure of a listed company’s success is its share price; Johnny Ho is now in the seventh year of his “three-year turnaround” of eBay, he’s spent a whole lot of shareholders’ funds, and still there is no sign of any improvement.

    So, what does the “smart money” on Wall Street think about eBay? Well, in late 2007 both eBay’s and Amazon’s stock prices were ~$40; now, with the US stock market at an all time high, eBay is still only ~$53 and Amazon is ~$396. What more telling data does anyone need to know that Johnny Ho has been an unmitigated disaster for all concerned, except for himself, of course?

    And I have to wonder if Pierre Omidyar ever thinks about just how much wealthier he might now have been had he not ok'd the handing over of the control of eBay to this incompetent, unscrupulous, narcissistic sociopath?

    Since “Chairman Ho” arrived on the scene, eBay’s long-suffering long shareholders have, relatively speaking, been effectively going backwards—at a quite steady rate of knots—notwithstanding the nonsense that constantly spews from the eBay Dept of Spin …

    The only people making any money out of eBay are Johnny Ho and the gaggle of like-bodied headless turkeys that he has surrounded himself with, and with whom he apparently spends all day blindly running around in circles with in the eBay executive suite.

    Clearly, the message from the smart money on Wall Street is that eBay Inc. is a "dog" and Johnny Ho is an utterly incompetent dog handler ... bit(DOT)ly/11F2eas

  • Report this Comment On December 20, 2013, at 10:31 AM, foolsmate wrote:

    I just don't get it at all. Why does The Fool keep peddling this trash unless it's straight from eBay's own PR department?

    Don't believe Philip and me? According eBay itself, Germany, the UK and Korea make up eBay's second biggest market accounting for 32% of revenue. As I don't speak German or Korean I often use the UK site to get a feel for the company.

    Try it yourself and see what eBay UK's own customer base thinks about the company and its future prospects.

    http://community.ebay.co.uk/t5/Seller-Central/Another-years-...

    This isn't an unusual thread, the discussion boards are always littered with similar ones.

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