Why Investors Shouldn't Worry Too Much About eBay's Data Breach

Some fear a Target-like backlash, but long-term eBay investors need not worry about the company's data breach.

May 31, 2014 at 6:00AM

E-commerce player eBay (NASDAQ:EBAY) is in hot water. The company is asking users to change passwords due to a cyber attack on 145 million accounts that compromised a database that contained encrypted passwords and other non-financial data. Although eBay is claiming that this breach has not resulted in any unauthorized activity for users, we already know what a data breach can do to a company from what we saw with Target (NYSE:TGT)

Target can recover
Target's breach compromised credit card data for 70 million-110 million customers, and the company had to engage in a massive recovery plan. The breach ended up claiming its CEO, and the company has struggled to post good results. Target can't measure exactly the impact of the breach on its performance, but the company can get back on track slowly.

We'll defer to fellow Fool contributor Daniel Kline for the explanation:

Customers however remain mostly confident in the brand -- about 85% of the retail chain's shoppers do not plan to change their spending habits at Target in the next year, according to a Bloomberg national poll. Only 7% plan to reduce their spending.

eBay's breach isn't Target's
In comparison, eBay's breach doesn't look as catastrophic as Target's. According to a press release, there is "no evidence of any unauthorized access to financial or credit card information, which is stored separately in encrypted formats."

So, eBay might recover from this event without serious problems. However, in case eBay's stock comes under pressure, investors should think of adding more shares to their portfolio, as the company's financial performance and growth strategies look impressive. It beat estimates in the first quarter, reporting revenue and adjusted earnings growth of 14% and 11%, respectively, versus the year-ago quarter. 

Bright prospects
eBay is focused on making the most of the rapidly changing buying behavior of consumers through its online, mobile, and other omni-channel commerce capabilities. eBay is controlling and leveraging its global commerce platforms in mobile leadership. It is also improving its operating discipline and execution, which have enabled it to post solid results. eBay marketplace, PayPal, and eBay enterprise platforms are driving solid volume growth for its customers and merchant partners. This should ensure a solid performance going forward. 

eBay's mobile business is growing at a solid rate, exceeding the company's own expectations. For example, in the last fiscal year, apart from continuously growing volume, eBay added more than 14 million new customers on mobile. These accounted for 40% of its total new users.

Looking forward to 2014 and beyond, there is a huge opportunity for the e-commerce giant as mobile continues to change traditional commerce. The lines between online and offline commerce are blurring, allowing eBay to tap the tremendous opportunities in the $10 trillion commerce market. 

eBay is making aggressive investments in three key areas. First, it is focusing on improving sales, marketing, and product experience. Second, the company is making moves in the omni-channel segment by increasing investments in eBay Now, in-store pickup, ship-from-store, and PayPal ubiquity. Finally, it is increasing investments in emerging markets and to drive cross-border trade.

The company is expanding its global footprint to accelerate e-commerce volume. The company believes that its commerce and payment platforms are growing in relevance to retailers of all sizes.

Final words
From a financial viewpoint as well, eBay looks like a good pick. It trades with a forward P/E ratio of 15, which is impressive considering that its earnings are expected to grow at a compounded annual rate of 13% for the next five years. The company's balance sheet also looks strong, with a cash balance of $8 billion and debt of $4.13 billion.

If the data breach does take a toll on eBay's shares in the short run, investors should consider it as a blessing in disguise, as the company's long-term prospects appear bright.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends eBay. The Motley Fool owns shares of 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.

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