eBay Inc. Stock Is Becoming Very Attractive

eBay (NASDAQ: EBAY  )  shares are languishing near 52-week lows. The company swung to a loss in the last quarter after taking a big tax charge for repatriating overseas cash, and PayPal's chief, David Marcus, left the company to head Facebook's  (NASDAQ: FB  )  messaging efforts. These events have weighed on the company's share price, but, eBay is still a fantastic business with great prospects.

Strong fundamentals 
eBay's marketplaces segment continues to attract buyers and sellers, who are conducting record transactions on its various platforms worldwide. Last quarter, the company's top line increased 14% year over year to $4.26 billion. 

PayPal also continues to be a major growth driver for the company; last quarter, PayPal's revenue grew 19% year over year to $1.85 billion, which is relatively faster than eBay's core marketplaces business, which grew 10% year over year to $2.2 billion. 

Both eBay and PayPal have a large number of customers in their respective platforms. PayPal has 148 million registered customers and eBay's marketplace has 145 million active customers. Both saw double-digit increases in the last quarter. With a strong performance of its core segments, eBay is still trading at a material discount to its intrinsic value. 

Short-term headwinds
eBay saw its operating income grow 10% year over year to $878 million in the last quarter, but swung to a loss because of a $3 billion charge for repatriating overseas cash. This charge for future tax payments drove eBay's EPS to negative territory and the stock started to trend lower. Investors were also surprised to see eBay pay the repatriation tax and bring funds back to the U.S. Other tech companies, like Apple  (NASDAQ: AAPL  )  and Google, have large sums of cash outside the U.S., but they issue debt to pursue capital intensive tasks and avoid large tax bills. 

In addition, PayPal's president, David Marcus, left the company to pursue his product-centric interests at Facebook. Mark Zuckerberg lured the executive with his visions for Facebook's messaging services. Marcus did a great job at PayPal and made big contributions growing both PayPal's customer base and revenue consistently. His sudden departure from PayPal wasn't warmly received by the market, and now the company's stock trades at recent lows. 

Cashflow and EPS growth
eBay trades at a very cheap valuation compared to its growth trajectory and future earnings estimates. The company currently trades at 14.4 times its 2015 estimated EPS of $3.40. The repatriation tax charge left a dent in its income statement, but the company's operating cash flow grew 25% year over year to $1.17 billion in the last quarter, and free cash flow grew 52% year over year to $968 million. 

In addition, the company has a large share repurchase authorization in place and has Carl Icahn as a loud shareholder. The activist shareholder has stated that he thinks eBay is extremely undervalued and that the company is worth a lot more.  Icahn made similar remarks when he took a position in Apple when the iPhone maker was trading in the $450 range (before the stock split). Icahn eventually pushed Apple's Board to hike the share repurchase authorization program, which it eventually did increase from $60 billion to $90 billion. Apple stock rallied, now sitting close to recent highs. 

eBay made heavy share repurchases in the last quarter, buying back $1.8 billion worth of shares, and now has $3.8 billion left in its share repurchase program. The company can generate immense value by buying back more stock at a depressed valuation. eBay's peers trade at much higher valuation multiples, and if the stock price continues to trade below $50, there is a very high probability that Icahn will demand more aggressive share repurchases. 

Going forward
eBay is a strong e-commerce and payments name that is trading at an attractive price. The company is a major transactions enabler worldwide, and PayPal is increasingly seeing more consumer adoption both online and through offline channels such as PayPal Here. eBay has very strong market positions in all of the categories in which it operates. The buyback program will aid the company in growing its EPS, and the presence of Carl Icahn is also a good advantage for investors. eBay's valuation is very attractive and there is a lot of upside left in its stock price. 

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  • Report this Comment On June 25, 2014, at 10:07 PM, OldeKingTroll wrote:

    eBay stock is currently in the pre-apogee pump stage looking for bag holders for the dump stage.

  • Report this Comment On June 26, 2014, at 3:08 PM, PhilipCohen wrote:

    When eBay get's back to ~$10 it might be attractive; and, even then, it would be contingent of the cretinous Johnny Ho having been handed his "pink slip" ...

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