Before today's 4% dip, shares of eBay (NASDAQ:EBAY) had been up 70% since the start of the year. And if yesterday's second-quarter results were indicative of anything, it's that eBay's long-term future as a business looks excellent. The stock, however, will remain volatile -- a victim of its own success.
The company has knocked the cover off the ball so many times in past quarters that simply knocking the ball out of the park seems to draw boos from the investment crowd. For the last few quarters, the stock tended to rise before each earnings announcement and then, usually, dip right after. Like a 7th-inning stretch, with eBay each quarterly report seems to be a time to relax and let some air out of the stock.
But the home team is winning. The company's second-quarter revenue rose 91% year over year, to $509 million, and operating income increased 91% to $152 million. Its operating margin was 30% (33% pro forma), edging ever closer to the 35% objective of 2005. Earnings per share clocked in at $0.33 ($0.37 pro forma), up 102%, while U.S. transaction revenue rose 45% and overseas auction revenue gained 146%.
eBay's operations generated $208 million in cash during the quarter, more than double last year's $92 million, but free cash flow dove due to the purchase of new office facilities -- a one-time event.
"Seasonality" is reportedly what disappointed some investors. While strong, growth was not as robust as previous quarters due to the effects of summer, a time when people tend to let their computers sleep more often as they themselves stand up and head outdoors. As eBay's business matures, seasonality is likely to become more pronounced. The current quarter is already experiencing this, with eBay projecting $515 million in third quarter sales, up only slightly from the second quarter.
But that doesn't dampen the online auctioneer's long-term prospects. With more than $2 billion in sales expected this year, eBay is well on its way to reaching its goal of $3 billion in 2005 revenue. Meantime, the $110 stock trades at 74 times the company's improved guidance of up to $1.47 per share in pro forma 2003 earnings, and at a similar multiple to free cash flow.
If you believe a company deserves to trade at valuation multiples near its growth rate, then eBay is right in the ballpark.
The company set a 2-for-1 stock split payable on August 28.
eBay is one of David Gardner's top picks in Motley Fool Stock Advisor.
