The stock price of eBay (NASDAQ: EBAY ) dropped almost 10% in the last few months, even though the broader market is near record highs. The company has very strong business segments in the forms of marketplaces and PayPal, both of which are seeing healthy growth rates. Ebay trades at a very cheap valuation compared to its peers and is also repurchasing a lot of its shares, which will lead to earnings-per-share growth in the future. And these factors will drive big upside in the company's stock price going forward.
Growth of PayPal and marketplaces
Both eBay and PayPal are seeing robust double-digit growth rates in their businesses and both units see extensive use for cross-border transactions around the world. PayPal is already a major global platform for payments with operations in 193 countries, and now the company is growing its footprint by adding 10 newer markets in Africa, Europe, and Latin America.
PayPal already has 148 million active customers globally, which will help it grow its customer count. According to Euromonitor, the 10 countries where Paypal plans to expand have more than 80 million Internet users and this will broaden PayPal's total addressable market. PayPal's revenue in the last quarter grew 19% year-over-year to $1.8 billion and roughly 25% of its transaction volume of $52 billion was cross-border. And PayPal will likely get a notable boost in transaction volume and revenue due to these expansion plans.
On the other hand, eBay's core marketplaces business has been improving its end-user experience in order to attract newer users and keep existing users active on its platform. The marketplaces segment already serves more than 145 million worldwide buyers and sellers and makes up more than 50% of the company's total revenue. In the last quarter, eBay's marketplaces revenue increased 10% year-over-year to $2.16 billion and the segment can sustain that growth rate going forward.
According to ChannelAdvisor, eBay's same-store sales growth in May 2014 stood at 11.5%, below Amazon's (NASDAQ: AMZN ) growth of 28.1% and the growth of Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) , mostly driven by search, which stood at 11.7%. So the growth in transactions on eBay's platform was pretty stellar, even though it was below that of Amazon.com.
The company's already cheap stock got another hit when the company announced that it will be taking a $3 billion charge on future tax payments for repatriating cash held outside the U.S. As a result, eBay now trades at a far more attractive valuation than its major online peers. The company currently trades at 14.9 times its 2015 earnings estimate of $3.39, which is much lower than the valuations of Amazon and Google.
Amazon trades at 108 times its 2015 earnings estimate of $3.07, and Google's Class C shares trade at 18.4 times its 2015 earnings estimate of $31.72. While both Google and Amazon are growing faster than eBay, the valuation discrepancy still seems pretty large considering that eBay is still a growth company with great prospects. As a result, the valuation of eBay will move higher. Merrill Lynch recently stated that eBay is one of the bank's top stocks and is very oversold, and the analysts at Merrill have a price target of $65 on eBay. Factoring in the cheap valuation of eBay and its future prospects, Merrill Lynch definitely did not set its price target too high.
Ebay is conducting heavy share repurchases and this will bolster the company's earnings per share in the future. The e-commerce giant bought back more than 33 million shares in the last quarter for $1.8 billion and still has $3.8 billion left in its buyback program. Ebay is producing healthy amounts of cash flow and has substantial cash on its balance sheet to extend its buyback authorization after it fully utilizes the current one.
In the last quarter, eBay's operating cash flow stood at $1.2 billion and its free cash flow stood at $968 million. And the company ended the first quarter of 2014 with $11.9 billion in cash and securities on its books. And activist investor Carl Icahn will likely push for a higher share repurchase authorization as the company is aggressively utilizing the current one to create value for long-term shareholders at existing prices. Carl Icahn has managed to get his associate David Dorman onto eBay's Board of Directors and that is a big boost for investors.
Ebay has a bright future as both of its core businesses are growing and focused on creating more value for consumers. The company's current stock price implies a highly attractive risk/reward ratio. And eBay aggressively buying back its shares at cheap prices will lead to stellar earnings-per-share growth in the future. The stock price of eBay is headed higher.
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