3 Major Reasons to Buy eBay

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. 

Attractive valuation
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. 

Share repurchases
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. 

Going forward
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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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.

  • Report this Comment On July 08, 2014, at 1:18 PM, OldeKingTroll wrote:

    eBay stock has entered the "Pump" phase.

  • Report this Comment On July 10, 2014, at 3:39 AM, PhilipCohen wrote:

    Hmm, I'd wait to see the second quarter results before I speculated any of my funds on this dog of a company ...

    Regardless, notwithstanding that the eBay Dept of Spin once proclaimed a “400% increase” in eBay’s stock price, from its ~$10 low during the 2008–2012 global recession, the fact is, in August 2007, immediately prior to the start of the GFC, when the "Pain From Bain", Johnny Ho, was already effectively in control of eBay, the share prices of eBay and Amazon were both ~$40. With eBay recently <$50 and Amazon >$300, clearly, the “smart money” on Wall Street recognises eBay to be a "dog", and Johnny Ho to be a very poor dog handler. Relatively speaking, all eBay’s “long” stockholders (including Pierre Omidyar) have been effectively going backwards ever since the cretinous Johnny Ho took the helm …

    The fact is, had eBay’s founder, Omidyar, traded in just the ~108 million eBay shares, that he still holds today, for shares in Amazon, in August 2007, before he approved the handing over of the control of eBay to the destructive, incompetent, unscrupulous, narcissistic, sociopathic and delusional Johnny Ho, instead of ~$6 billion, his worth would now have been ~$32 billion! Now that, surely, is something for all of eBay's long-suffering "long" investors to think about, is it not? ...

  • Report this Comment On July 10, 2014, at 12:40 PM, jrkirk wrote:

    Although I may have missed it, I fail to see any mention in this article of the changes brought about by Google's Panda 4.0 algo update changes to ebay stock. Some ebay sellers are reporting significant drops in traffic and are attributing their lost sales to this update, which apparently happened in late May. Googling Panda 4.0 & eBay gives independent software tech type reports showing up to 80% declines in search results for items listed on ebay. This is apparently widely know about in tech and website circles, but I can't find any significant discussion anywhere on financial sites. Does the author have any thoughts about what appears to be a significant hit to ebay's overall sales over the last few weeks, which sellers are attributing to this Panda 4.0 update? Tech writers are reporting Google's intention to update this algo weekly, which could prove to be something that could be a continuing problem for ebay in the coming weeks. As a long time ebay seller, I can confirm the sales declines in the last few weeks. Any thoughts?

  • Report this Comment On July 10, 2014, at 6:17 PM, motleyLiam wrote:

    Thing is, Ebay will not address the Google Panda update. As far as Ebay is concerned, users do not find items via search engines and then click over to Ebay - they think (naively, arrogantly, pick your favorite) users go to Ebay first and begin searching.

    Ebay would NEVER concede, and say "Yes, buyers search on Google first, then click over to Ebay".

    Never ever.

    And this is just but one segment of the trouble with Ebay.

  • Report this Comment On July 10, 2014, at 8:19 PM, jrkirk wrote:

    Motley, while this may well hurt you and I in the short term, as we are both apparently ebay sellers, it could well hurt ebay investors much more severely, due to the impact on ebay's next quarter earnings, which should be out toward the end of July. If the stock breaks down below the 47-48 range, it could go back into the 34-36 range, using technical analysis. And that will be on top of the disappointment it brought to investors in their last quarter's earnings, when they missed expectations and the stock dropped to it's current 50-52 range. I do not know the significance of this Google Panda 4.0 update and the poor Google search results, but tech writers are saying that Google is going to punish ebay for using ads links and infringing on their ad territory. If they are correct, then Google can make it hurt, at least in terms of Google search results ratings, which apparently has already happened, given the poor sales reported by top sellers. This won't show up in earnings until the next quarters report near the end of July, so it could get interesting here in the next few weeks, if things are fixed soon.

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