- eBay is an overlooked e-commerce company in a year dominated by e-commerce.
- Unlike many stocks, eBay looks to trade at a reasonable value, especially considering the company's shareholder-friendly moves this year.
- The company has ideas for expanding its business, which would only make a good investment opportunity better.
Our experts issued a rare "Double Down" Buy alert on this one stock... Learn more.
There's value in avoiding restrictive investing labels. For example, two common labels are "growth" and "value," but these points of view aren't mutually exclusive. Successful investors balance these viewpoints to identify top opportunities. The trick is finding a great business trading at a good value relative to its growth. But admittedly, this is getting harder, because stock valuations are historically high right now.
According to the following data from YCharts, the price-to-earnings ratio for the S&P 500 is at a 10-year high of 31. Historically, the P/E ratio has been below 25.
There are two parts to explaining the increased P/E ratio. First, earnings have plummeted because of the coronavirus pandemic. When earnings go down, valuations increase if stock prices don't go down as well. But the second part of the problem is that stock prices have gone up, stretching the P/E multiple even further.
In a world of pricey valuations, one S&P 500 stock stands out as a good balance of growth and value. E-commerce pioneer eBay (EBAY 1.70%) just celebrated its 25th anniversary, but its second act could just be getting started.
A (still) growing e-commerce titan
It's easily overlooked, but eBay is the third largest e-commerce company in the world by internet traffic, trailing only Amazon and Japan's PayPay Mall, according to Web Retailer. The company still enjoys top-of-mind presence among consumers, as evidenced by the boost its business has received during this turbulent year.
In eBay's third quarter, it reported revenue of $2.6 billion, good for 25% year-over-year growth. And through the first nine months of 2020, net revenue is up 16%. It's been a long time since the company grew this fast, which is encouraging. But its marketplace business probably shouldn't be expected to expand at this accelerated pace once the coronavirus pandemic ends.
That said, eBay is likely to remain relevant for a few reasons. First, it has over 183 million active buyers, a growing number of people familiar with the platform. Second, the pandemic has certainly made e-commerce more relevant than ever, and this relevance will likely endure once life returns to normal. And third, the company estimates people currently only sell about 20% of their used items online, an opportunity to process more volume for a long time.
An enticing value
Unlike many other stocks right now, eBay looks like a value stock. The company expects fourth-quarter earnings per share of $0.58 to $0.64. At the low end of guidance, that would put full-year EPS at $3.00. Therefore, eBay stock currently trades for just 16 times full-year 2020 earnings, about half the current valuation of the S&P 500.
EPS guidance includes eBay's Classified business even though the company already sold this unit. The deal isn't expected to close until early next year, and when it does, this will reduce earnings. But for perspective, the Classifieds business only provided eBay with $132 million in operating income through the first nine months of 2020. By comparison, continuing operations have generated almost $1.8 billion over that time, so the company is only losing a small percentage of its profit.
eBay is likely gaining more than it's losing. The company will get $2.5 billion in cash when the deal closes, plus a 44% stake in Adevinta, the Norwegian classified-ad company purchasing the Classifieds business. With that cash injection, the company can continue rewarding shareholders as it has done lately.
Through the first nine months of 2020, eBay has spent $4.7 billion buying back its own stock. And it has paid out $337 million in dividends at a quarterly pace of $0.16 per share. As of Sept. 30, the company had about $2.5 billion left on its buyback authorization, which management expects to continue. And eBay could soon raise the quarterly dividend. Last time, it increased 14%.
CEO Jamie Iannone took over in April, running with ideas for growing the business beyond its core marketplace platform. For starters, over the next year, eBay expects to get sellers to use its new payment service, which it hopes can contribute $500 million in annual operating profit by 2022. Also, the company is getting into the certified refurbished business. It may sound weird, but it's the perfect complement to the company's strengths and could provide another avenue of growth.
These ideas and more will take time to bear fruit. But to me, investors today are paying a great price for eBay's marketplace alone. The deal simply gets sweeter if any of these new ventures pay off long term.